Employee Stock Ownership
Employee stock ownership is a type of benefit that many companies offer employees as part of their compensation package. The stock ownership program has the same basic goal of all incentives -- to encourage employees to work harder and attract skilled workers looking for the best benefits possible. Stock incentive plans are also a key part to many executive compensation programs and are a primary way of rewarding top business leaders. There are a few different types of stock benefits companies can offer.
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Stock Option Plans
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A stock option plan is one of the more common methods of awarding stock to employees. The option plan does not grant stock outright -- this type of immediate granting is more commonly seen with executives, although option plans are often given to key leaders as well. Stock options grant employees the ability to buy company stock at a certain price. These options are vested over a period of time, so employees must work at the company for a certain number of years before being able to use the options and buy stock directly.
Taxes
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There are two different kinds of stock option plans, qualifying and non-qualifying. A qualifying plan meets a strict list of regulations set by the government in terms of how the options work and who they apply to in the company. The benefit of qualifying is that the profit made from investing through these plans is subject to the lower capital gains tax rate. Non-qualifying plans are easier for companies to customize, but must pay the higher income tax rate.
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Purpose
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For employees, a stock option plan provides a choice of when to buy stock. Wise employees wait until the stock price has risen far beyond the price their options specify, so they can buy stock at a large discount and make immediate profit. Companies use stock plans as a form of employee encouragement. Company shares improve as the company improves, so many businesses believe that employees will make better decisions at work if they have a stake in the business' success.
Employee Stock Ownership Plan
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An Employee Stock Ownership Plan is different from a typical stock option plan. An ESOP revolves around an account that a business uses to hold its stock for employees. The employees rarely own the stock themselves, but the ESOP account allows the business to be more flexible when it compensates employees. A private company, for example, can use an ESOP to store private stock for employees, and then buy that private stock back when employees retire, so that workers can profit from a stock plan even though shares are not traded on a market.
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