Explain how employee stock ownership plans (ESOPs) differ from stock options.
What will be an ideal response?
Stock options give employees the right to buy a certain number of shares of stock at a specified price. In an employee stock ownership plan, the organization distributes shares of stock to its employees by placing the stock into a trust managed on the employees' behalf. Both encourage employees to focus on the success of the organization as a whole. However, stock option plans give employees the opportunity to buy stock at a price that has been previously fixed. Employees may focus so much on stock price that they lose sight of other goals, including ethical behavior. Ideally, managers would bring about an increase in stock price by adding value in terms of efficiency, innovation, and customer satisfaction. But there are other unethical ways to increase stock price.
ESOPs are more common and usually have broader eligibility to a larger group of employees. They carry more risk for employees since an ESOP must invest at least 51 percent of assets in the company's stock. Problems with the company's performance therefore can take away significant value from the ESOP. Many companies set up ESOPs to hold retirement funds, so these risks directly affect employees' retirement income. Adding to the risk, funds in an ESOP are not guaranteed by the Pension Benefit Guarantee Corporation. Finally, employees sometimes use an ESOP to buy their company when it is experiencing financial problems. Still, ESOPs can be attractive to employers. Along with tax and financing advantages, ESOPs give employers a way to build pride in and commitment to the organization. Employees have a right to participate in votes by shareholders (if the stock is registered on a national exchange), meaning that employees participate somewhat in corporate-level decision making. Research suggests that the benefits of ESOPs are greatest when employee participation is high.
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