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Employee Stock Ownership Plan – Definition

Employee Stock Ownership Plan (ESOP) Definition

An employee stock ownership plan (ESOP) is an employee benefit scheme that gives ownership interest to the employees of a company. It can also be called a corporate strategy whereby the company grants ownership to its employees. ESOP benefit both the company and the employees in terms of tax advantages.

Basically, some companies use ESOP as a corporate strategy to level the wide gap between shareholders interest and employee’s interest. Some companies also facilitate ownership interests for their employees to serve as incentive or compensation for the work they have performed. ESOP signifies the ownership interest of a company held by employees of the company.

A Little More on What is an Employee Stock Ownership Plan – ESOP

Corporate organizations use the employee stock ownership plan (ESOP) as a tool to achieving specific goals. The benefit scheme gives employees similar rights to the right of shareholders of the company which in turn stimulates corporate performance. Organizations also minimise conflicts with the use of ESOP, employees act in position of shareholders to enhance corporate values and control in the organization.

ESOP can also be used for incentive or compensation purposes, a company can reserve some stocks or shares which are protected and continue to grow till some employees retire or resigns from the organization. At the point of retirement or resignation, the company purchases the vested stocks from the retiring or resigning worker. The benefits of the vested stocks are given to the retiree either as a lump of sum or series of payment.

References for Employee stock ownership plan (ESOP)

Research article for Employee stock ownership plan (ESOP)

AN ANALYSIS OF THE EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) FINANCING TECHNIQUE WITH EXAMPLES OF ITS USE PRIOR TO 1977., Galloway, J. C. (1981).

On the Frustration of China’s Employee Stock Ownership Plan——In Perspective of ESOP Development Laws and Value Targeting [J], Lei, W. A. N. G. (2010). Journal of Jinggangshan University (Social Sciences), 3.

Leadership during the transition to an employee stock ownership plan (ESOP), Sieniarecki, M. J. (2016). (Doctoral dissertation, University of Phoenix).

Benefits of an Employee Stock Ownership Plan in Succession Planning: An ESOP Can Be Used to Finance an Owner’s Exit from a Business and Has the Added …, Burke, M. M. (2015). Journal of Accountancy, 220(4), 64.

AMI mulls plan for second ESOP (employee stock ownership plan), Kim, H. (1988).

Nu-Med plans to spin off 6 hospitals to new ESOP (employee stock ownership plan), Taravella, S. (1989).

ANALISIS PENERAPAN EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) TERHADAP KINERJA KEUANGAN & PERFORMANCE SAHAM, ANDREAS, K., & SOLEHAN, A.

[PDF] EMPLOYEE STOCK OWNERSHIP PLAN (ESOP), RADWAN, A., & REGUCKI, T.

MODERASI ESOP (EMPLOYEE STOCK OWNERSHIP PLAN) MEMPERKUAT PENGARUH FREE CASH FLOW TERHADAP KEBIJAKAN DIVIDEN, Anam, M. C. (2016). (Doctoral dissertation, UNIVERSITAS AIRLANGGA).

Estimating the value of employee stock option portfolios and their sensitivities to price and volatility, Core, J., & Guay, W. (2002). Journal of Accounting research40(3), 613-630. This paper presents an accurate method of estimating option portfolio value and the sensitivities of option portfolio value to stock price and stock‐return volatility that is easily implemented using data from only the current year’s proxy statement or annual report.

Valuing employee stock option plans using option pricing models, Smith, C. W., & Zimmerman, J. L. (1976). Journal of Accounting Research, 357-364. This paper aims to ease the accounting problem of valuing an employee stock option plan using results from current finance research in option pricing.

Stock option plans for non-executive employees, Core, J. E., & Guay, W. R. (2001). Journal of financial economics61(2), 253-287. This paper examines determinants of non-executive employee stock option holdings, grants, and exercises for 756 firms during 1994–1997. Results show that firms use greater stock option compensation when facing capital requirements and financing constraints. These results are consistent with firms using options to attract and retain certain types of employees as well as to create incentives to increase firm value.

Employee stock option exercises an empirical analysis, Huddart, S., & Lang, M. (1996). Journal of Accounting and Economics21(1), 5-43. This paper describes the exercise behavior of over 50,000 employees who hold longterm options on employer stock at eight corporations.

Employee stock options, Huddart, S. (1994). Journal of Accounting and Economics18(2), 207-231. This paper examines the valuation of employee stock options (ESOs).

Market valuation of employee stock options, Aboody, D. (1996). Journal of accounting and economics22(1-3), 357-391. This study investigates whether investors incorporate the value of a firm’s outstanding employee stock options into its stock price.

Broadbased Employee stock options in us ‘new economy’firms, Sesil, J. C., Kroumova, M. K., Blasi, J. R., & Kruse, D. L. (2002). British Journal of Industrial Relations40(2), 273-294. The article examines the use of broad-based employ stock options plans by new US companies.

The effects of financial reporting costs on the use of employee stock options, Matsunaga, S. R. (1995). Accounting Review, 1-26. This study uses data on 123 firms over an 11 year period to examine whether the accounting for employee stock options permits them to be used as part of an income management strategy.

How to value employee stock options, Hull, J., & White, A. (2004). Financial Analysts Journal60(1), 114-119. This paper explores the difficulty in calculating the fair value of employee stock options at the time of acquisition. The main aim is to present an approach to calculating the value of employee stock options that is practical, easy to implement, and theoretically sound. Upon the implementation of this approach, different conclusions are met.

Causes and effects of employee stock option plans: Evidence from Singapore, Ding, D. K., & Sun, Q. (2001). Pacific-Basin Finance Journal9(5), 563-599. This study highlights the determinants for the adoption of employee stock option plans (ESOPs) in Singapore and measures the impact of ESOP announcements on the shareholder wealth of adopting companies.

Real investment implications of employee stock option exercises, Bens, D. A., Nagar, V., & Wong, M. F. (2002). Journal of Accounting Research40(2), 359-393. This paper examines a real cost of awarding employee stock options. Results indicate that ESO exercises potentially impose a real cost on the firm in terms of foregone investment opportunities.

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