Managing the ESOP benefit
The average ESOP company contributes between 8 and 12 percent of an employee owner's wages into their ESOP account on an annual basis. This contribution is somewhere between three and four times the average 401k company match. This is a huge benefit to the employee owners and a wonderful marketing tool in recruiting new employees.
For many ESOP companies, the selling shareholder sets up the original financing and structure of the ESOP. A key question that gets missed in these original ESOP discussions is - "What level of benefit can the company support long term"?
This is not an easy question, as it is intertwined into the highest level of strategic thinking. Remember that the ESOP benefit is tied to the value of the company stock. The allocation of cash (be it generated or from debt) for equipment, acquisitions, executive compensation, the ESOP benefit level, or other items, requires a deep analysis of the impact on the stock value long term.
ESOP benefit levels are not locked in stone and can be modified, but be sure that the modifications are reviewed by qualified experts. This is just one step of many in the sustainability of an ESOP. Take the step!