The Difference Between Aesop and ESPs
Years ago, when an exuberant human resource director was listing the many benefits coming my way if I joined their team, she was especially excited when she mentioned ESOP. Not being overly experienced in the realm of benefits available to a new graduate, my immediate thoughts turned to Aesop’s Fables. As you may know, this is a collection of stories credited to Aesop, a storyteller believed to have lived in ancient Greece between 620 and 564 BC. Through the means of later collections, and translations or adaptations of them, Aesop's reputation as a fabulist was transmitted throughout the world. As fables are largely fiction, I was confused as to what Aesop had to do with my employment.
Fast forward 40 years and I’ve been well-rewarded for participating in the ESOP’s offered me over the years. An employee stock ownership plan (ESOP) is a qualified defined-contribution employee benefit plan designed to invest primarily in the stock of the sponsoring employer. Today, ESOPs are "qualified" in the sense that the ESOP's sponsoring company, the selling shareholder, and participants all receive various tax benefits. The tax benefits alone are well worth your consideration of these plans if they are offered. As always, consult your personal attorney or tax specialist for how these plans may work for you.
The fundamental reason for adding an ESOP to your investment mix is that, as an employee of the company, you will have a bird’s eye view of the performance and potential successes for the company. Logically, a company’s share price is eventually reflective of their business successes. New products, new services and new customers all add to potential success over the years.
An ESOP is by its very nature a long-term investment. Your focus will be on accumulating more and more shares over the years as, ideally, the company becomes more and more successful. Many companies eventually pay dividends to their shareholders and through an ESOP the dividends can be automatically reinvested in additional shares. Over the life of your employment you will continue to increase the number of shares in your account, and often an ESOP becomes a major component of a retirement and/or an estate plan.
ESOP’s are not a “magic bullet” in terms of investment choices or returns on investments. A company can lose value in their shares through competition, market downturns, recessions, and any other events which affect the value of shares of any company. However, as an employee you will not have to rely on any fables or third-party tales for your information. You will be right in the middle of the story as it develops!
Article written by Patrick Catania