What is an Employee Stock Ownership Plan (ESOP)?

An Employee Stock Ownership Plan (ESOP) is a program that provides a company's workforce with an ownership interest in the company through the acquisition of stock. The correct answer highlights that an ESOP involves the sale of ownership to a retirement fund, which is a key aspect of how these plans operate.

In practice, companies create ESOPs to align the interests of employees and shareholders, encouraging employees to think and act like owners. This is accomplished by establishing a trust fund that buys the company’s shares, often using borrowed money that the company pays back over time, making it an important tool for both employee motivation and corporate finance. Employees typically receive the stock as part of their retirement benefits, which can be a valuable asset upon retirement.

The nature of ESOPs helps foster a sense of ownership among employees, which can lead to increased productivity and loyalty. Moreover, the structure of ESOPs allows for a unique succession planning strategy, giving business owners an option to sell their shares while also rewarding and engaging their employees.