The company may then donate stock directly to the ESOP fund, or the plan may purchase the shares from the company. At the end of each year, stock is allocated to each employee according to a formula based on experience, salary, hours worked during the year, or any other criteria that reflect the worker's contribution to the firm. Various tax incentives make the formation of ESOPs more palatable to private owners. For example, owners who sell their shares to an ESOP can defer the capital gains tax on the proceeds of the sale, provided only that the ESOP winds up with at least 30 percent ownership and that the seller reinvests the proceeds in other American-owned companies. Other tax deductions reduce the cost of ESOPs by permitting companies to deduct the cost of stock donations and, in certain situations, by permitting lenders to deduct 50 percent of the profits on loans to ESOPs.
Some owners choose to sell out to their employees for reasons more philosophical than tax breaks.
In the case of Web Industries' founder Robert Fulton, when the time came to retire from the company he was less interested in selling to the highest bidder than to the most deserving one. It's that simple. You can set out on the journey and you don't have to predetermine how fast you're doing it. A 1986 NCEO study found that sales and employment grow 8 percent to 11 percent faster per year in companies that combine worker ownership with a participative style of management. A study conducted by the General Accounting Office concluded that ESOP firms with open, inclusive management styles experienced annual productivity leaps 52 percent higher than they might have expected before becoming worker owned.