An Employee Stock Ownership Plan (ESOP) is a type of employee benefit plan that enables employees to become partial owners of the company they work for. In an ESOP, the company contributes shares of its stock to a trust fund, which then allocates these shares to eligible employees based on specific criteria, such as years of service or compensation levels. The employees receive these allocated shares as part of their overall compensation package, which they can typically access or sell upon meeting certain conditions.
In an ESOP, let's say a company establishes a trust fund and contributes 10% of its shares to the fund. The shares are then allocated to employees based on their compensation levels. For example, an employee who has been with the company for five years might receive 100 shares, while another employee who has been with the company for ten years might receive 200 shares. Over time, as the company's stock value increases, the employees' allocated shares also grow in value. If the employee decides to leave the company or meets specific vesting conditions, they can sell their shares and realize the value they have accumulated through the ESOP.