How Does a Stock Bonus Plan Work?

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Employers come up with a variety of ways to offer their employees benefits. These benefits are additions to wages that make the job more attractive. Many benefits are insurance options, or some type of retirement fund that allows employees to grow money as they work toward retirement. Stock bonus plans are based on the success of the company. Employers use these tactics to draw in more competent employees.

Stock Bonus Plan

A stock bonus plan is a hybrid version of a profit sharing plan. In profit sharing plans, employers grant employees deposits into retirement accounts based on the profits that the company has made during the year. Stock bonus plans are the same, but employers give shares to employees instead of direct funds.

Process

Stock bonus plans are not guarantees for money, and can vary greatly from year to year. Employers have a choice whether or not to place any money in stock bonus plans, and in a bad year they might choose to not grant any stock. However, there are typically limits as to how much stock an employer can grant in one year to employees. Sometimes 401(k) plans are also part of stock bonus plans, depending on the company's benefit arrangements.

Requirements

There are a number of requirements that a stock bonus plan must meet. Participants must have to pass through voting rights on the stock held by the plan, and must have the ability to demand that the employer buy back the securities if the stock is not publicly traded. Employers must distribute the stock within one year of retirement, death, or disability, or within five years if the employee is terminated but still eligible.

Benefits

A stock bonus plan is a good deal for employees if the company has a steady increase in growth and profit. A successful company will increase the value of its stocks, and a long-term employee will be able to realize a large amount of profit from these shares upon retirement, more than other methods would have been able to offer.

Considerations

Unfortunately, stock bonus plans are very unsure benefits. There is no promise that an employer will even pay a bonus of stock at all from year to year, even in successful years. When employees receive stock and it is vested, there is no guarantee that the company will continue to be successful enough to make stock a worthwhile investment.

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