An Employee Stock Ownership Plan (ESOP) is a defined contribution plan which makes the employees owners of the company. As owners, employees may be more motivated to improve corporate performance because they can benefit directly from company profitability. The primary investment of the ESOP must be company stock, although most plans will also include a cash fund for transactions.
An ESOP may be leveraged, allowing the employer to borrow money and pledging shares of employer stock into a suspense account to be released as the loan is repaid. In a non-leveraged ESOP, contributions are made in shares of stock or to purchase shares of company stock.
ESOP’s are utilized by employers seeking a source of capital while providing employees with a personal stake in the performance of the company.