Frequently Asked Questions

Employee Ownership FAQs

Common questions about employee stock ownership plans (ESOPs), employee ownership trusts (EOTs), and other forms of employee ownership, from the basics to technical topics.

This FAQ is written primarily for business owners, managers, and advisors involved in setting up or running an employee ownership plan. If you're an employee at an ESOP company looking to understand your own benefits and rights, see our articles on Working at an ESOP Company and The Rights of ESOP Participants.

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How is stock allocated in an ESOP?

Most companies allocate stock based on compensation (typically defined as the amount on the employee's W-2 tax form), plus elective deferrals under Section 401(k) plans and cafeteria plans. That is, each participant in the plan gets a percentage of the total shares allocated equal to that participant's percentage of total eligible pay. Eligible pay excludes pay in excess of $360,000 per year in 2026 (to be indexed for inflation in $5,000 increments after that). While W-2 compensation is the norm, compensation could also be defined to exclude bonuses or other "add-ons" to pay, provided the effect is not to push allocations more towards more highly paid people. About two-thirds of all ESOPs allocate on relative pay.

For a detailed description of the rules and uses for ESOPs, see Understanding ESOPs.

Link to this FAQ Topic: ESOP Plan Design & Participation