An Employee Stock Ownership Plan (ESOP) is a form of employee benefit plan that allows workers to own a portion of the firm they work for. An ESOP involves the corporation contributing shares of its stock to a trust fund, which subsequently distributes these shares to qualified workers depending on particular criteria, such as years of service or wage levels. Employees get these allotted shares as part of their total pay package, and they can normally access or sell them after completing specific requirements.
Example
In an ESOP, suppose a firm creates a trust fund and donates 10% of its shares to it. The shares are subsequently distributed to employees depending on their remuneration levels. For example, an employee who has been with the firm for five years may earn 100 shares, but someone who has been there for ten years may receive 200 shares. As the company's stock value rises over time, so do the values of the employees' assigned shares. If the employee decides to leave the firm or satisfies certain vesting criteria, they can sell their shares and realize the wealth earned via the ESOP.
