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Employee Stock Ownership Plans (ESOPs)

Definition: A trust set up by a company to allot some of its stock to its employees over time. Used as an employee incentive, the plan often provides tax benefits to the company.

Employee Stock Ownership Plans (ESOPs) are similar to profit-sharing plans and allow owners of privately held companies to share ownership with their employees. They are good ways to motivate employees and increase the distribution of company shares and create markets for them.

Technically, ESOPs are defined-contribution employee benefit plans that invest primarily in the stock of the employer company. As such, most ESOPs distribute the company's stock to employees as a benefit, rather than selling employees the shares. ESOPs are commonly used to give retiring owners a way to cash out all or part of their holdings without selling the entire company. But creating a market for shares of the company can also be used to raise funds for expansion. ESOPs are easy to set up and are used by thousands of employers.

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