Disadvantages of ESOP:
1. Dilution. If the ESOP is used to finance the company’s growth, the cash flows benefits must be weighed against the rate of dilution.
2. Fiduciary Liability. The plan committee members who administer the plan are deemed to be fiduciaries, and can be held liable if they knowingly participate in improper transactions.
3. Liquidity. If the value of the stock appreciates substantially, the ESOP and/or the company may not have sufficient funds to repurchase stock, upon employees retirement.
4. Stock Performance. If the value of the company does not increase, the employee may feel that the ESOP is less attractive than a profit sharing plan.
5. In an extreme case, if the company fails, the employees will lose their benefits to the extent that the ESOP is not diversified in other investments.
6. Individual employees’ accounts are credited with the stocks acquired by ESOP. They can also acquire stocks through stock options. Stock options provide employees the right to buy shares at a definite price for a defined number of years in future.
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