An ESOP benefits the company when it is used as a technique of corporate finance as well as an employee benefit plan. Corporate ESOP benefits include raising new equity capital, refinancing outstanding debt, or acquiring productive assets using cash borrowed from third-party lenders. ESOPs can also be used to increase cash flow by making plan contributions in stock instead of cash.
Since contributions to the ESOP are fully tax deductible, an employer can fund both the principal and the interest payment on an ESOPs debt service with pre-tax dollars.
Dividends on ESOP stock are tax-deductible if they are applied to repay ESOP loan principal, the proceeds of which were used to acquire the employer securities with respect to which the dividends were paid. Reducing loan principal with pre-tax contributions and dividends generates significant tax savings, which in turns benefits the ESOP company’s cash flow.
There is strong statistical evidence that employee ownership improves employee morale and productivity and reduces turnover. Surveys conducted by The ESOP Association show that most Association members report improved employee morale and productivity due to their ESOP benefits. A study by the National Center for Employee Ownership (NCEO) during the 1980s found that ESOP companies grew more than 5% faster than their non-ESOP counterparts. Moreover, the study showed that ESOP companies with participative management styles grew at a rate three to four times faster than traditionally managed ESOP companies. The NCEO results have been replicated by a number of later studies, and it is now generally accepted that ESOPs, especially in participatively managed companies, can improve a company’s productivity.
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