Compensation Management

1. Compensation ManagementEmployee Stock Ownership Plans (ESOP) Prepared By : MM Institute of Management

2. Outline • Define ESOP • Advantages of ESOP • Merits of Employee Stock Option • Uses for ESOPs • Major Tax Benefits • Demerits of ESOP • Disadvantages of ESOP

3. Key Words: • ESOP • Stock option

4. ESOP • Employee Stock Ownership Plan (ESOP) is an employee benefit plan. The scheme provides employees the ownership of stocks in the company. It is one of the profit sharing plans. Employers have the benefit to use the ESOPs as a tool to fetch loans from a financial institute. It also provides for tax benefits to the employers.

5. Advantages of ESOP

6. Merits of Employee Stock Option • To Understand the Company as Shareholder • To Know About the Future Progress of the Company • To Motivate the Employee and Create Saving Habits • Developing Interest in Investing in Company • To Maintain Relationship Between Company and Employee

7. Uses for ESOPs • To buy the shares of a departing owner • To borrow money at a lower after-tax cost • To create an additional employee benefit

8. Major Tax Benefits 1.Contributions of stock are tax-deductible: That means companies can get a current cash flow advantage by issuing new shares or treasury shares to the ESOP, albeit this means existing owners will be diluted. 2.Cash contributions are deductible: A company can contribute cash on a discretion-ary basis year-to-year and take a tax deduction for it, whether the contribution is used to buy shares from current owners or to build up a cash reserve in the ESOP for future use. 3.Contributions used to repay a loan the ESOP takes out to buy company shares are tax-deductible: The ESOP can borrow money to buy existing shares, new shares, or treasury shares. Regardless of the use, the contributions are deductible, meaning ESOP financing is done in pretax dollars.

9. Major Tax Benefits(contd..) 4.Sellers in a corporation can get a tax deferral: In C corporations, once the ESOP owns 30% of all the shares in the company, the seller can reinvest the proceeds of the sale in other securities and defer any tax on the gain. 5.In S corporations, the percentage of ownership held by the ESOP is not subject to income tax at the federal level (and usually the state level as well): That means, for instance, that there is no income tax on 30% of the profits of an S corporation with an ESOP holding 30% of the stock, and no income tax at all on the profits of an S corporation wholly owned by its ESOP. Note, however, that the ESOP still must get a pro-rata share of any distributions the company makes to owners.

10. Major Tax Benefits(contd..) 6. Dividends are tax-deductible: Reasonable dividends used to repay an ESOP loan, passed through to employees, or reinvested by employees in company stock are tax-deductible. 7. Employees pay no tax on the contributions to the ESOP, only the distribution of their accounts, and then at potentially favorable rates: The employees can roll over their distributions in an IRA or other retirement plan or pay current tax on the distribution, with any gains accumulated over time taxed as capital gains. The income tax portion of the distributions, however, is subject to a 10% penalty if made before normal retirement age.

11. Demerits of ESOP 1.Though voluntary in nature, some employees may feel they are being forced to join. 2.Employees earnings at present and in future become subject to a greater risk (that of performance of their employer) 3.It is being used as a management tool to fend off takeover attempts. Holders of employees owned stock often align with management to turn down bids that would not only benefit outside stock holders but would also replace existing inefficient management and restructure operations. 4.There is no direct relationship between the effort and reward

12. Disadvantages of ESOP

13. Contact Us: MM (Deemed to be University) Mullana, Ambala – 133207, Haryana, India Tel: +91-1731-274475,76,77,78 , Toll Free: 1800 2740 240 Email: info@mmumullana.org, Website: www.mmumullana.org

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