As a rule, employee stock ownership plans (ESOPs) cost more to start and administer. Private companies are required by law to purchase ESOP shares from departing employees, which can be a major expense. In addition, private companies with ESOPs must pay appraisers to determine their stock prices each year.
Choose the Right Vesting Schedule for Stock Options
A vesting schedule details the amount of time it takes for employees to become entitled to a percentage of their company stock options. Some companies offer new employees immediate vesting as a type of sign-on bonus. Others structure their plans so that options vest over a period of years, creating an incentive for employees to remain with the company. Still other businesses reward employees for hard work through performance-based stock options plans that vest incrementally when certain performance goals are met.
Determine the Best Stock Plan for Your Business
The decision to start an employee stock ownership plan (ESOP) or employee stock purchase plan (ESPP) depends in part on your management philosophy. You’ll need to ask yourself how committed you are to the concept of employee ownership, either through employee stock ownership or some other means. Companies with employee-owners often boast higher productivity and increased employee loyalty, longevity, and satisfaction.
Question the Appropriateness of Stock Ownership
Company stock has become a popular form of employee incentive, but it’s important to remember stock ownership is not appropriate for all growing businesses. High-growth companies funded by outside financing are the most appropriate candidates for stock options because they are most likely to go public or be acquired by a larger company, thus providing a market for the stock.