• receive shares as a bonus
• buy shares from the company
• receive shares through an ESOP, or employee stock ownership plan

Companies have various reasons for wanting to set up an ESOP for their employees:

1. in order to use ESOPs as a way to buy out a failing company
2. in order to use an ESOP as a takeover defense
3. the main reason to use an ESOP is to motivate employees and to reward employees
4. to set up a market for the retiring or leaving owners of a successful company

How ESOPs work

The closest other set up to an ESOP is a profit-sharing pan. The way that an ESOP works, on the most basic level, is as follows: a company decides to set up a trust fund. Then the company puts in shares of its own stocks into the trust fund. Conversely, the company can opt to simply deposit cash in order to buy already existing shares of the company.

Another way that an ESOP can work is that the ESOP ends up borrowing money so that it can purchasing new shares or existing shares. Then the company will give contributions to the ESOP in cash as a way of repaying the loan.

Other than the obvious benefits of improving employee satisfaction and morale, ESOPs can have other benefits for companies. Any contribution that the company gives to the ESOP can be written off as tax deductible.

The shares of the ESOP are most commonly distributed to individual employee accounts. Any employee who is over the age of 21 can be a art of the ESOP. Furthermore, the rights of older employees to the shares that are resting in their account increase throughout the years. This process is called "vesting." Any employee in your company should be fully vested in the company in five to seven years.

When an employee decides to leave a company, then that employee receives all of his or her share options. The company, however, must be permitted to buy back these share options. The company is required to purchase the share options at their full market value at that present time. The issues that employees can vote on differs for private and public companies. In public companies, employees have the right to vote on all issues, just like other shareholders. In private companies, employees are able to vote on any major issues, like shutting down the company or moving the plant.

Drawbacks of ESOPs

While ESOPs have a lot of benefits, they also have some drawbacks.

• It will cost around $30,000 to set up an ESOP, even if it's incredibly simple.
• Private companies have to purchase the shares of any employee that leaves.
• Shares will become diluted as new stocks are issued.

For more information on how to set up an ESOP, and also for support and for resources as a company that offers ESOP, you can visit www.esopassociation.org. On this site, you will be able to find a lot of information, guidance on how to set up your own ESOP, legal issues, and also the benefits of setting up an ESOP for your employees.