5 Major Pros and Cons of ESOP

5 Major Pros and Cons of ESOP

by / Comments Off / 330 View / Feb 12, 2015

Many companies offer retirement plans that are designed to be an additional compensation to employees beyond salary. Companies that have better retirement plans often receive more qualified job applicants and have a more dedicated workforce. One type of retirement plan that many companies are choosing are ESOPs. An ESOP is also referred to as an employee stick ownership plan.

This type of retirement plan is much different from other options and offers a variety of benefits that many companies or business find appealing. This type of retirement plan for employees is deigned to be primarily incentive based, which is something that businesses can benefit from. Before you make your own opinion about ESOPs, it is important that you understand all the advantages and disadvantages associated with this option.

What Are the Pros of ESOPs?

If a company is looking to keep control, but also increase cash flow this type of retirement plan is best. It offers benefits that can mean a lot to small businesses that are looking to grow and expand. Below are some of the biggest ESOP pros.

1. More Access to Cash
Any company that is dealing with cash flow issues can really benefit from ESOPs. Cash flow is a huge factor for many businesses and they are always looking for way to get more access to cash. All a company has to do is issue treasury stick on an ESOP no higher than 15% of the total annual payroll. This means that the amount of cash flow a company has access to is increased and the total amount of corporate taxes that must be paid are also lowered. This only adds to the abundance of cash that your company has access to and eliminates cash flow problems with ease. The savings that are earned from improved cash flow can make a huge difference for any company.

2. Employee Incentive
Another unique aspect of ESOPs is that there is a lot of employee incentive tied to this type of retirement plan. This means that the motivation among employees is improved due to the fact that they have a stake in the earnings of the company. The more profits that the company takes in allows their retirement plan to increases as a result. This creates a link between the benefits that employees get access to and their overall productivity. Many employees do like the ability to own stock in the company that they work for and are even glad to improve their efficiency to help increase the value or stock of the company. Both the company and the employee can benefit from ESOPs.

What Are the Cons of ESOPs?

Since ESOPs are so unique and are designed to be beneficial to companies, there are a few known downsides to this type of retirement plan. Below are just a few of the more well known cons surrounding ESOPs.

1. Disclosure
Even though employees have stock in the company, they are not permitted to have access to annual reports or shareholders meetings. This means that they do not have full disclosure of the stock and value of the company. However, if someone that retains an ESOP does leave the company they can then be entitled to annual reports. It is only once they are no longer employed that this type of disclosure exists.

2. Not Privately Owned
The best candidates for ESOPs are businesses that are privately owned. Businesses that are not privately owned can not benefit as much from ESOPs and are not the best candidate for this type of retirement plan option.

3. Verdict on ESOPs
This can be a very beneficial retirement plan for many businesses that are looking to increase cash flow and give employees an incentive to work harder However, not all businesses are the best candidate for this retirement plan and there is also the issue of disclosure.

Why is a Retirement Plan Important?

A retirement plan is important because it is designed to prepare individual for retirement. Employees are looking for employment with businesses that understand their need to plan ahead. Some retirement plans are more aggressive than others, but most employees are looking for a retirement plan that simply offers stability and allows them to begin preparing for the future right away. ESOP’s are unique because they offer benefits to both employees and companies based on their design. This type of retirement plan is unlike other alternatives.

Are ESOP’s Worth It?

Deciding if ESOP’s are best depends on your business. Companies that re looking for a unique retirement plan for their work staff can get access to a number of benefits that are not possible with other options. Before you make a decision ion this type of retirement plan it is a good idea to look at both the pros and cons from a fresh perspective. This allows you to weigh the good against the bad and determine if this retirement plan is ideal.