In a typical employee stock ownership Plan, the company contributes shares of stock to employees. The contribution is tax deductible to the company, and employees do not have to pay tax on the stock or earnings until they receive money for the stock.
Companies use ESOPs to help attract, retain and motivate their employees. Some research suggests that employees who own stock are motivated to improve quality and control costs.
For employees, the ESOP can become a retirement supplement. That is, the value of the stock, when employees retire, can be converted into monthly payments or they may be able to take a lump-sum payment.
However, many firms report some dissatisfaction with ESOPs, primarily for two reasons.
One, if the value of the stock builds, some younger employees quit after only five or 10 years of service. The company pays them the value of their stock.
Two, many employers report that they do not see the added motivational impact among their employees who qualify for the ESOP. Many employees admit that they do not understand the " value of the plan. Others say that their ownership is so small, it really does not make much difference.
Companies that have the most impact with their ESOP's differ in two noticeable ways.
First, the more satisfied companies devote considerable time to communicating to employees: why the plan was formed, the financial value to the employee, benefits to the company and how to read the periodic reports that show the value of their ownership.
Second, these companies combine an employee participation program with their ownership plan. The combination of an ESOP and participation in management decision-making is more likely to attain the employee commitment that management seeks.
(Gerald Graham is a professor at Wichita State University and a management consultant. Send questions to The Wichita Eagle, P.O. Box 820, Wichita, Kan. 67201.)
Indicate whether you agree or disagree with each of the following:
Employee stock ownership plans . . .
1. Are typically used as incentives to retain good employees.
2. Allow employees to delay paying taxes on the value of this benefit.
3. Are universally effective in retaining employees.
4. Are universally effective in increasing employee motivation.
5. Are often misunderstood by employees.
6. Actually encourage some employees to quit after a few years.
7. Need to be explained by intense communication efforts.
8. Are more effective when combined with employee participation in decision making.
9. Can sometimes cause a burdensome cash drain on the company.
10. Require some effort to make them effective.
Interpretation. Most experts would identify numbers 3 and 4 as false and the remainder true.