Once the ESOP owns all of the company stock, it faces the challenge of how to get stock into the hands of new employees. Watch our video to learn more.
Approaches to Free Up Shares
The simplest and most straightforward approach is for the corporation to simply issue and contribute new shares to the ESOP and allocate those to the shares just like it does in a stock bonus plan. Shares are contributed out of corporate growth. As retained earnings increase, new equity is created for the new employee participants.
More typically, however, ESOPs engage in repurchase liability planning. This involves distribution planning to free up shares to be reallocated to other participants’ accounts.
At the most creative end of the spectrum, different allocation formulas can be used to provide preferential allocations to newer participants versus older participants to allow a more balanced allocation of shares.