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Restricted stock and direct stock purchase plans have become increasingly popular as ways to compensate employees. Often used just for key employees, they also can be used more broadly.

It's easy to get lots of technical information about stock options, restricted stock, stock appreciation rights, phantom stock, performance shares, and other equity sharing tools. It's also easy to find guidelines for executive ownership of equity in public companies.

If you have decided an employee stock ownership plan (ESOP) is worth investigating, there are several steps to take to implement a plan. At each point, you may decide you have gone far enough and that an ESOP is not right for you.

There are five basic kinds of individual equity compensation plans: stock options, restricted stock and restricted stock units, stock appreciation rights, phantom stock, and employee stock purchase plans. Each kind of plan provides employees with some special consideration in price or terms.

The NCEO’s 2023 Employee Ownership 100 list includes the nation’s largest companies that are at least 50% owned by an employee stock ownership plan (ESOP) or other broad-based employee ownership plan. Many are 100% employee-owned.

ESOPs have tax and planning advantages that can make them attractive ways to transition a business, reward employees, or finance growth. But their biggest advantage may be the competitive edge they provide. 

By NCEO Founder Corey Rosen

Congress designed ESOPs to be the most cost-effective means for both owners and companies to provide for business transition. There is also no better way to preserve the legacy of your business and keep your options open for your role in the company going forward.

Understanding what is in your ESOP account and what the rules are for when and how you will get it can seem complicated. While there are general rules all ESOPs must follow, plans do vary from company to company.

While ESOPs are the most tax-favored and fiduciarially sound way to share ownership with employees, 401(k) plans provide an alternative that may be appropriate in some cases. These plans can also operate in conjunction with an ESOP.