week 4 discussion

week 4 discussion - Employee stock ownership plans, or...

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Employee stock ownership plans, or ESOP, is the practice of companies giving their staff discounted shares of their own company stock as part of their salary over time (Wikipedia). There are several varieties of employee ownership that I will discuss in this review, which include direct purchase plans, employee stock ownership plans (ESOP’s), stock options, restricted stock and restricted stock units, phantom stock, stock appreciation rights, and worker cooperatives. Direct purchase plans are where employees can purchase shares of stock in their companies with their own net earnings. In the United States and several other countries, there are special direct purchase plans where they allow employees to buy shares of stock at a discounted rate (typically around 15% off) after a set period of time. The caveat to this plan is that they have to set aside post tax income for a certain amount of time (usually six months to a year), and then they can buy shares of their company. This discounted rate could be the applied to the stock shares at the time of purchase, or when they first started allocating funds, whichever is lower (Wikipedia). The second type of employee ownership plan is the employee stock ownership plan, or ESOP. This plan is the most important kind in the United States, and has provisions for it under U.S. retirement law, created in 1974. Essentially, an ESOP is where a employee benefit trust is created by the company. The company may then fund this trust directly with cash to buy stock, giving shares of stock, or, the least favorable option, borrowing money to buy stock in the employee benefit trust fund’s name. An important point to note about the ESOP is that the U.S. retirement laws that created it specifically stated that there must be no discrimination amongst the employees in favor of the higher up managerial types (Ehrhardt & Brigham, 2009). The third type is stock options, which lets employees buy shares of company stock at a fixed price for a predetermined number of years. The fixed price component is the potential lure companies provide for employees to invest in their company. Restricted stock is a variant of stock options whereby an employee may earn shares either through gift or direct purchase after they meet certain restrictions. Number of years worked or performance targets are typical of the kind of restrictions applied. This is a nice incentive based plan that rewards the employees in the form of stock and the company in the form of increased productivity from its employees. Phantom stock is where a company promises to pay an employee a cash bonus that is directly correlated to the value of the company’s stock. This plan is often more enticing to employees because cash is a more useable form of payment than stocks and it avoids the volatility of the stock market. This trend has been more popular recently because it has been found that employees typically sell their stocks options given to them fairly quickly. The
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This note was uploaded on 12/02/2011 for the course ECON 101 taught by Professor Smith during the Spring '11 term at Ill. Chicago.

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week 4 discussion - Employee stock ownership plans, or...

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