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Lesson 1. Employee Stock Options > The 30-Second Recap - Pg. 5

Employee Stock Options 5 These alternatives work better in some situations than in others. I mention them here because they cover a significant number of employees nationwide. It is also possible that some companies may use more than one form of stock incentives. ESOPs An ESOP is often mistakenly called an employee stock option plan. In truth, ESOP stands for em- ployee stock ownership plan. An ESOP is a way of offering stock incentives to employees. ESOPs are particularly favored by privately held companies as a way of rewarding employees and letting the owner(s) sell off some of their stock. The major difference between an ESOP and an employee stock option plan is that ESOPs are defined benefit plans and subject to certain government and tax restrictions. Plain English A defined benefit plan is a retirement program, like a pension plan. A defined benefit plan spells out how much the plan will pay on retirement. An ESOP must include every employee, whereas an employee stock option plan does not. This means participation has to involve some common factor such as pay and not serve as a reward for performance. ESOPs are fairly expensive to set up and maintain, although there are tax benefits for the company under certain circumstances. There usually aren't many decisions for employees until they leave or retire. They can hold on to the stock or may be required to sell it back to the company under a predefined formula. I explain ESOPs in more detail in Lesson 14, "Employee Stock Ownership Plans."