Esop Case Study

1.6 ESOP

According to Zvi, Marcus and Merton (1988) there are two types of pensions; Defined benefit plan where the former employee is paid fixed sum regularly and a Contribution plan where the fixed sum is invested and when retiring it becomes available. The contribution plan can mean both the employer investing fixed sum of money into the pension account (and hopefully it will increase over the years) or the employee has an opportunity to purchase the firms stocks and get a lump of sum in near future, when retiring. Or in other case – when parting the company. This thesis focuses on the retirement scheme and more precisely the Employee Stock Based Plan (ESOP).

Employee Stock Ownership plan or shortened “ESOP”, is a trust or a fund which is established by a firm acting as a retirement account supplement making the employees (usually management level employees) the firms part owners by purchasing the firm’s

The large companies managers decision are more likely than the actions of lower-level employees affect the stock price – thus stock ownership is more likely to be a better incentive for key executives than for operating level employees. In particularly in the case if the lower-level employees do not have part of decision making process.

2. In some cases there are issue which is called “free rider problem” among lower-level employees. The activity of all workers could increase performance and productivity, but only one of the employees makes a marginal contribution, thus the individual employee has limited incentive to participate more actively.

Many of the empirical studies show that the adoption of ESOP as a simply employee benefit is beneficial to stakeholders. Results indicates that the ESOP does not improve firm’s performance when measuring profitability and productivity, instead it actually suffered the firm’s general performance by 3-5% and only variable which was improved was the employee participation to decision making. (Borstad & Zwirlein,