Profit-sharing plans have long been popular with employees because of the opportunity they provide to share in the profitability of a growing firm. Many business owners look beyond shared profitability to shared ownership through employee stock ownership plans (ESOPs).
ESOPs are essentially “defined contribution” benefit plans. However, unlike most defined contribution plans, ESOPs invest primarily in the sponsoring company’s stock. This can help motivate workers to do their best, since they have an ownership stake in the company and may directly benefit from an increase in the value of the company’s stock. On the other hand, the level of benefits paid to plan participants is not guaranteed, and employer contributions to the ESOP can vary.
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