Employee Stock Ownership Plan ESOP | Definition | What is it?

Employee Stock Ownership Plan ESOP

Employee Stock Owernship Plan (ESOP)

Employee Stock Ownership Plan. An ESOP is an employee benefit plan by which employees of a company become owners of stock in that company. Several features make ESOPs unique as compared to other employee benefit plans. First, only an ESOP is required by law to invest primarily in the securities of the sponsoring employer. Second, an ESOP is unique among qualified employee benefit plans in its ability to borrow money. As a result, "leveraged ESOPs" may be used as a technique of corporate finance.

The two most common uses of ESOPs are: (a) to buy the stock of a retiring owner in a closely held company, and (b) to provide an extra employee benefit or incentive plan. These two uses probably account for over two thirds of all the ESOPs now in existence. Another common use of an ESOP is as a technique of corporate finance for a variety of purposes--to finance expansion, make an acquisition, spin off a division, take a company private, etc. In a small number of cases--about 2%--ESOPs have been used to buy out a failing firm that would otherwise close.

Related to Employee Stock Ownership Plan ESOP:

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• Investment Book
• Hedge Fund Terms and Definitions

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