Employee Stock Ownership Plan (ESOP)

An Employee Stock Ownership Plan (ESOP) is a qualified, defined-contribution retirement plan that provides employees with an ownership interest in the company. ESOPs are designed to align the interests of employees with those of the company’s Shareholder/">Shareholders, encouraging employees to work towards the company’s success since they directly benefit from its profitability and growth.

In an ESOP, companies create a Trust Fund and contribute new Shares of Stock or cash to buy existing Shares. Employees receive Shares in the ESOP based on a formula that typically considers their salary and years of service. When employees leave the company, they can sell their Shares back to the company or on the open market, depending on the company’s structure.

For example, a manufacturing firm might establish an ESOP to enhance employee engagement and retention. As the company grows and becomes more profitable, employees benefit from the increased value of their Shares, creating a sense of ownership and incentivizing them to contribute to the company’s success.

One notable case is that of the Giant Eagle grocery chain, which implemented an ESOP to empower its employees and enhance productivity. The plan not only increased employee motivation but also improved overall company performance.