Employee stock ownership plans, often referred to as ESOPs by business, legal and financial
professionals, can be incentives if offered in the right setting, but that is not to say that there cannot be a
few kinks in the system, as there can be in any employee benefit plan.
An ESOP is a qualified, employee benefit plan designed to benefit the employees of a company. By
qualified, this means that an ESOP must stay within certain guidelines and regulations designated by the
Internal Revenue Service and the Tax Code.
In addition to benefits to employees, ESOPs can financially benefit employers too through tax
provisions. Also, the establishment of an ESOP may increase corporate profit.
When employee participants gain an ownership stake in the company, productivity and efficiency could,
as a result, increase, meaning a better bottom line for the company in the long run.
ESOPs can also provide a mechanism for raising capital on a cost-efficient basis by taking advantage of
certain tax-saving opportunities available to ESOP companies.
Kientz, Martin, Hill & Breazeale, LLC, is a financial advisory firm that helps business owners and
affluent families with their wealth transfer planning, or estate planning. They also help family-owned
businesses with executive benefits such as ESOPs.
The work Kientz, Martin, Hill & Breazeale has done in the past with ESOPs has specifically been in the
area of feasibility studies to help determine the suitability of an ESOP for a particular business.
ESOP could mean
psychological advantages, too
Don Breazeale, CLU, ChFC, with Kientz, Martin, Hill & Breazeale, said that by implementing an ESOP
into a business’ employee benefits, there are psychological advantages as well as financial ones.
“You take on that ownership mentality,” he said of participants. “The employee participates in the
employer’s or the company’s growth. Rather than contributing blood, sweat and tears and not
benefiting from it, they become vested in the growth of that company.”
Gilbert Van Loon, an associate attorney with Butler, Snow, O’Mara, Stevens & Cannada, PLLC, pointed
out that the once popular option of offering ESOPs has now fallen by the wayside for many
corporations. He does work for a number of ESOPs, although he hasn’t put any in for a number of
“They’re a greater expense and a greater administrative difficulty,” he explained. “Complexity and
expense is a disadvantage.
Another potential problem: employee morale. Employee morale is a two-way street, and communication
“You have to put the owner mindset in all those individuals and make them realize they’re a part-owner
and they can make a difference in what their retirement is going to reflect,” Van Loon said.
“I think a company that has a fairly large payroll, a fairly steady workforce and a value that doesn’t
fluctuate substantially from year to year would be the best candidate (for an ESOP),” he said.
Setting up an ESOP is very similar to setting up any other type of qualified retirement plan, although
there is no such thing as a prototype document with an ESOP.
Partner Debbie Dees, with Phelps Dunbar, LLP, explained that with ESOPs, members of plans actually
get stock allocated to their accounts.
“There are a lot of big success stories out there,” she said of the plans.
The way companies set up their ESOPs varies. Sometimes stock option plans are limited only to key
people in a company; sometimes anyone in the company can participate. Other types of ESOPs are
stock appreciation, in which employees are treated as if they own stock in the company, but they merely
get only the appreciation of the stock.
Dees said the pros and cons of having an ESOP go back to whether the value of the stock goes up or
“The first thing (a company) needs to figure out is what they want to accomplish. Do they want it (an
ESOP) for employee retention, or is it something they want to do on top of their retirement structure
and benefits package? Or is it to benefit their key people?”
Many times the way an ESOP is set up is by breaking it into categories of levels of management.
Using ESOPs with 401(k)
plans could mean success
BancorpSouth is one corporation that has implemented employee stock ownership plans. The company
uses it in conjunction with their 401(k) plan and the first 5% of the employee’s contribution of their
salary is matched dollar for dollar in company stock.
W.O. Jones, senior vice president of BancorpSouth’s human resources division, said employee
participants currently have close to 6% of the corporation, but that number has been as high as 10% in
The ESOP plan and the 401(k) plan can work in tandem, Jones said.
“We have to call it a 401(k) and ESOP because we require the first 5% to go into stock,” he explained.
Jones said the corporation’s stock is still up 15% to 20% over what the average is.
“And I think most of our employees’ thoughts are that they’re basically buying this (stock) for
half-price, getting tax deferrals and the dividends,” he said. “It’s probably not a bad deal.”
For a company to implement an ESOP, Breazeale suggested they go to a financial advisory firm, a CPA
or law firm to have a feasibility study done. Doing so can make evident the benefits, disadvantages, tax
ramifications and long-term ramifications of the implementation of such a plan.
Contact MBJ staff writer Elizabeth Kirkland at firstname.lastname@example.org or (601) 364-1042