Ownership With Employees example essay topic

Many companies sponsoring an employee stock ownership plan and trust ('ESOP Companies') face a significant issue after either the debt incurred to purchase the ESOP's interest is repaid in full or the ESOP reaches its maximum ownership level (e. g., 100%) by some other means. At that point, it gets very difficult to provide broad-based equity incentives to new employees who were not employed during the time the debt was being repaid or the original contributions were made. Basically, this sometimes develops two classes of employees: those who are owners through the ESOP and those who are not because no shares are being allocated. Clearly, these new employees will not have the same 'ownership' mentality as older ones who shared in substantial allocations of company stock during the period in which the ESOP was accumulating its ownership. Obviously, repurchase and / or re-contribution of distributed company stock and reallocation of forfeitures offsets this problem to a certain extent, but these sources of shares within the ESOP are often not enough on their own to provide meaningful ownership to the next generation of employee-owners. Before examining 'solutions' to this problem, please recognize that this is another of those 'ESOP problems' which actually have nothing to do with Esop per se.

Assuming that ownership is motivational, and that motivating employees is good for a corporation, then the shareholders are going to have to share ownership with employees to get that benefit. This is in no way affected by the fact that one (or all) of the shareholders is an ESOP. Getting ownership in the hands of all employees will have to occur, and, as is true of any benefit or other discretionary expense of a corporation, the benefit of ownership can only come from the current owners. Where the current owners include an ESOP, there may be a few additional fiduciary concerns, but the decision to use equity as an incentive benefit is largely unchanged. Providing for New Employees After All the Shares Have Been Allocated Given all the above, there are only two ways to provide ownership interests for these new employees; both methods involve diluting the percentage interest of the current shareholders, hopefully to generate the larger absolute value created by the incentive of broad ownership.

The first method is to use newly issued shares of company stock either as a direct contribution medium or through additional leveraging to finance other corporate activities. The second method, which has been suggested by some in the ESOP community, is to adopt a method of profit-sharing accounting which basically re-shuffles the cash and the company stock components of participants' accounts each year so that all participants have the same ratio of company stock to cash in their ESOP account regardless of when they may have begun participating in the plan. A number of ESOP companies and professionals favor the first method, but several very respectable professionals have advised their ESOP clients to follow the second approach.