As appealing as the tax benefits are, the employee stock ownership plan does have limits and disadvantages. The amount of time, effort and funds for developing an employee stock ownership plan is substantial, possibly $30,000 for the simplest plans in the smallest companies. Also, any time new shares are issued, the stock of existing owners is diluted. That dilution must be weighed against the tax and motivation benefits an ESOP can provide. Finally, ESOPs will improve corporate performance only if combined with opportunities for employees to participate in decisions affecting their work.
Employee stock option plans, which should not be confused with the employee stock ownership plan, are contracts that give the employee the right to buy a share of stock at a pre-specified price for a pre-specified term. Stock option plans can be a flexible way for companies to share ownership with employees, reward them for performance, and attract and retain a motivated staff. Most employee stock options expire in ten years and are granted with an exercise price equal to the market price on the date of grant. As discussed in the case, the Economic Value Added (EVA) system provides a cash payout today, while a stock option system gives employees the right to receive payment by exercising the