How Do Employees Participate in ESOPs?

Shares of an employee stock ownership plan are allocated to employees based either on relative pay or on a level formula such as seniority. The way in which employees receive the stock may differ depending on the plan. They may buy it directly, receive it as a bonus, or gain it as part of a profit sharing plan.

ESOP benefits are generally paid to employees after they leave the company. The income an employee receives from an ESOP depends on the contributions made to the plan and the performance of plan investments, rather than a pre-determined benefit based on a set formula. The value of shares given to employees each year is usually different from the amount needed to pay off any outstanding trust loan used to buy more shares. If share prices rise, the value of shares given out will be higher than the amount used to pay off the loan. If they fall, it will be less.

Employees who leave the company before they are fully vested typically forfeit some or all of their shares. Some ESOP plans pay dividends to employees while they are still employed.

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