Experts say those methods are being used in some cases to offset wage stagnation and mute criticism of layoffs in a period of record profits. But programs based on compensation carry the risk that the company will not consider other requirements for establishing an ownership culture. Even when employees have a direct financial incentive to improve their performance, the company's shift in culture means sharing financial information and giving employees a real voice in the way a company is being managed. Understanding ESOPs ESOPs have been the most common route for establishing ownership cultures. A retirement benefit plan approved by Congress in 1974, an ESOP requires employees to invest primarily in the sponsoring company.
Companies establish ESOPs by creating a trust and contributing money or stock to it.
Contributions are tax-deductible, and stock is allocated to individual employees usually at no cost based on seniority and compensation. ESOPs are defined-contribution plans, rather than defined benefit plans. Returns are tied to the company's performance and can decrease in value. The company must also set aside money to repurchase stock when employees leave. J. Michael Keeling, president of The ESOP Association in Washington, D.C., says the number of ESOPs has increased dramatically in 20 years from about 2,000 plans in 1976 to an estimated 10,000 plans representing 10 million employees in 1996.