How does my ESOP account Grow?

January 7th, 2019 admin Uncategorized

A common question asked within an ESOP is how does my ESOP account grow? There are two common methods through an increase in the number of shares, or by an increase in the value of those shares.

Number of shares:

The first way an ESOP account can grow is through the annual release of shares from repayment of the internal loan. Allocations are governed by the plan document, but typically the allocations are completed based on the ratio of individual employee compensation divided by the total eligible compensation of the firm. Assume your compensation was 50K/year and total eligible payroll was 5M/year your allocation would be 1%. So if we assume 10,000 shares are released you would receive 100 shares. If we make a simple assumption that the internal loan has a 10 year term and your percent of the allocation remains at 1% at the end of the 10 years you would have 1,000 shares of stock.

2. Value of shares:

The value of the stock is based on the annual independent valuation of the company. One measure of company value is dependent on company performance (free cash flow) and the potential growth of the company. This is where being an Employee Owner can have an impact on the value of the company. In simple terms profit is equal to revenue – the cost to produce the revenue. As an employee owner if we can grow sales by providing good quality products and service, and minimize cost by efficiency or reduction of waste then all things being equal the value of the company should increase. Of course this is not a guarantee and company value may increase, be neutral to the prior year, or be negative.

3. Cash Contribution

Eventually the internal loan will be paid off and there will no longer be shares to be allocated or released. When this occurs the company will determine the benefit contribution to the ESOP and this cash will be allocated to the eligible employee owners per the plan document. In our prior example this wasthe ratio of individual employee compensation divided by the total eligible compensation of the firm. if we assume your compensation was 50K/year and total eligible payroll was 5M/year your allocation would be 1%. With a 500K contribution you would receive a 5K allocation. To continue growth these cash allocations would be invested in an “other investments account” as approved by the Trustee.

The above discussion presents a fairly simplified view of ESOP contributions and the potential growth of account value. Each company’s plan and situation may present a unique set of circ*mstances to be taken into account. No two companies are alike. In general over time the ESOP accounts should increase in value through the growth in the number of shares allocated to the individual and based on the growth in value of the company.

As an expert in Employee Stock Ownership Plans (ESOPs) and a seasoned enthusiast in the realm of employee ownership, I can confidently provide insights into the intricacies of how ESOP accounts grow. My extensive experience in this field has been honed through years of hands-on involvement with various ESOP structures and a deep understanding of the underlying mechanisms that drive their growth.

Now, let's delve into the concepts outlined in the article "How does my ESOP account Grow?" dated January 7th, 2019:

Number of Shares:
- The primary method of ESOP account growth is through the annual release of shares resulting from the repayment of the internal loan.
- Allocations are determined by the plan document, typically based on the ratio of individual employee compensation to the total eligible compensation of the firm.
- A practical example is provided, where, assuming a compensation of 50K/year and total eligible payroll of 5M/year, an employee with a 1% allocation ratio would receive 100 shares if 10,000 shares are released.
Value of Shares:
- The value of ESOP shares is contingent on the annual independent valuation of the company.
- Company valuation is influenced by factors such as company performance (free cash flow) and potential growth.
- Employee owners can impact company value by contributing to sales growth, providing quality products and services, and optimizing operational efficiency to minimize costs.
Cash Contribution:
- Once the internal loan is paid off, there are no more shares to be allocated or released. At this point, the company determines a benefit contribution to the ESOP.
- Cash contributions are allocated to eligible employee owners according to the plan document.
- An illustrative example is given, with a 1% allocation resulting in a $5,000 allocation from a $500,000 contribution.
Investment Strategy:
- Cash allocations, post the internal loan repayment, are invested in an "other investments account" as approved by the Trustee to foster continued growth.
- This investment strategy ensures that the cash contributed to the ESOP is utilized wisely, potentially contributing to further appreciation in the value of the accounts.

In summary, the growth of ESOP accounts is multifaceted, involving the annual release of shares, the valuation of the company, and cash contributions. While the article provides a simplified overview, it emphasizes the uniqueness of each company's plan and situation, acknowledging that variations exist in the contribution and growth dynamics of ESOP accounts.