Eva Comparison With Direct Employee Stock Ownership And Option Plans

EVA Comparison with Direct Employee Stock Ownership and Option Plans

An employee stock ownership plan (ESOP) is a type of defined contribution benefit plan that buys and holds company stock. Employees do not actually buy shares in an ESOP. Instead, the company contributes its own shares to the plan, contributes cash to buy its own stock or has the plan borrow money to buy stock, with the company repaying the loan. All of these uses have significant tax benefits for the company, the employees, and the sellers. Employees gradually vest in their accounts and receive their benefits when they leave the company. This differs from the EVA plan which provides the employee immediate payout.

As appealing as the tax benefits are, the employee stock ownership plan does have limits and disadvantages. The amount of time, effort and funds for developing an employee stock ownership plan is substantial, possibly $30,000 for the simplest plans in the smallest companies. Also, any time new shares are issued, the stock of existing owners is diluted. That dilution must be weighed against the tax and motivation benefits an ESOP can provide. Finally, ESOPs will improve corporate performance only if combined with opportunities for employees to participate in decisions affecting their work.

Employee stock option plans, which should not be confused with the employee stock ownership plan, are contracts that give the employee the right to buy a share of stock at a pre-specified price for a pre-specified term. Stock option plans can be a flexible way for companies to share ownership with employees, reward them for performance, and attract and retain a motivated staff. Most employee stock options expire in ten years and are granted with an exercise price equal to the market price on the date of grant. As discussed in the case, the Economic Value Added (EVA) system provides a cash payout today, while