Your employee stock ownership plan probably increases company risk

Employee stock ownership plans (ESOPs) are supposed to align employee and company interests and in theory decrease risk. But as an employee, you actually materially increase risk if you get paid stock rather than cash: if your company gets into trouble you lose your job and your savings (stock price drops).When things go well for a company it should take more risk, but ESOPs might make employees take less risk, in essence locking in their profit.

When things don’t go so well a company should reduce risk. But employees, who might feel they are about to lose everything, might gamble with the hopes of saving their jobs and savings.

One comment

  1. I agree Sabah. ESOP’s are fine in principle and keep costs low for Employers but for Employees a proper Company savings plan invested in risk managed funds are a far better option in the long term and separates the dependence on their Employer should things go wrong. As many Apple and Bank employees found out its not a good idea to put all your eggs in one basket. From an Employers point of view if you want to hold on to key employees and motivate them then a sensible route is an Employee Savings scheme which is sponsored by the company and held under Trust is a very effective solution and can also have vesting conditions set on it to retain key employees longer term.

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