An employee stock ownership plan (ESOP) is an employee-owner program that provides a company’s workforce with an ownership interest in the company. The ESOP is a defined contribution plan, a form of retirement plan as adopted by IRS codes in U.S., which became a qualified retirement plan in 1974. Korea also adopted ESOP in 1968 by enactment of Capital Market Promotion Act and this system transplanted in the Framework Act on Labor Welfare states ESOP in 2001. In the ESOP, companies may provide their employees with stock ownership by preferential allocation with treasury stock, often at no up-front cost to the employees. The ESOP is one of the useful methods of employee participation in corporate ownership. ESOP shares, however, are actual part of employees’ remuneration for work performed. Shares are allocated to employees and may be held in an ESOP trust during certain period of time that required in law or until the employee retires or leaves the company. The shares are then sold to exit.
Today, very narrow number of private companies, and it is conglomerates of case, are operating ESOPs that are structured as employee stock ownership association. Such corporations get some benefits including worker cooperatives, but unlike cooperatives, control of the company’s capital is not necessarily evenly distributed. Compared with cooperatives, ESOP-centered corporations allow for company executives to have greater flexibility in governing and managing the corporation. Most corporations, however, utilize stock ownership plans as a form of in-kind benefit, as a way to prevent hostile takeovers, or to maintain a specific corporate labor culture.
ESOPs are regulated by Tax Code and Employee Retirement Income Security Act (ERISA), a federal law that sets minimum standards for investment plans in private industry in U.S. In a material way, Internal Revenue Code §404(a)(3) provides specific condition of benefit under the plan.
In the U.S. ESOP, just as in every other form of qualified pension plan, employees do not pay taxes on the contributions until they receive a distribution from the plan when they leave the company. They can roll the amount over into an IRA, as can participants in any qualified plan. ESOPs, by definition, concentrate workers’ retirement savings in the stock of a single company. There is no requirement that a private sector employer provide retirement savings plans for employees. Therefore, ESOPs may concentrate workers’ retirement savings in the stock of the same company on which they depend for their wages and current benefits, such as health insurance.
Some studies conclude that employee ownership appears to increase production and profitability and improve employees’ dedication and sense of ownership. However, employee stock ownership can increase the employees’ financial risk if the company does badly. Several researches show that ESOP companies are more successful than comparable firms and, perhaps as a result, were more likely to offer additional diversified benefits to the labor and management alongside their ESOPs. ESOP advocates agree that an ESOP alone cannot produce such effects; instead, the ESOP must be combined with worker empowerment through participatory management and other techniques.
In this research, I argued how non-listed small and medium-sized corporation can use ESOP to get some benefits as possible. I proposed qualified employee should be expanded to collaborating corporation, more flexible stock option system for employee of ESOP must be introduced, and loan type ESOP have to be activated, etc. The focal point of my argument in the study is that the ESOP may produce wonderful effect if it is combined employee retirement pension plan.