Each ESOP is unique and must consider their own company goals when deciding the appropriate benefit levels. There should be an ongoing balance between the company cash flow and participant benefit levels. The goal is to maximize the expected return for the participant, however, to do so the ESOP program must be sustainable and not hinder the growth of the company. A consideration especially as an ESOP matures is determining the appropriate benefit level. Consistent benefit levels can help with a sustainable repurchase process and set expectations for the plan participants. Benefit levels are measured based on the contributions and the fair market value.
Contribution Benefit Level
The contribution level is the summation of cash and share contributions, shown as a percentage of eligible compensation. In our experience we have seen on average that non leveraged plans are contributing between 6-10% of eligible compensation. Leveraged plan contributions are averaging 10-15% of eligible compensation. This is the annual contribution the company makes to the plan as a percentage of eligible compensation.
Total Fair Market Value Benefit Level
The benefit level is the summation of cash contributions not used for ESOP loan payments, the value of share contributions, the fair market value of shares released from contributions used for ESOP loan payments, cash dividends not used for ESOP loan payments, and the value of reallocated forfeitures shown as a percentage of eligible compensation. This is the annual benefit the participant receives as a percentage of compensation. For example, if the plan has a 10% benefit level and a participant’s eligible compensation is $100,000 than they would receive a benefit of $10,000 as an ESOP allocation. This could be a combination of stock and cash if the Company contributes more cash than what is needed to fund the repurchase liability. However, in most ESOP’s it’s most common that the benefit level is the value of stock allocated.
It is important for ESOP companies to know the benefit levels they are providing their participants. After the company establishes a target benefit level they can tailor the plan’s distribution policy, repurchase obligation strategy and other ESOP levels. To assist the company in targeting its benefit level goals for the ESOP participants. Blue Ridge ESOP Associates can assist you in this understanding with our ESOP Repurchase Obligation services. Please contact your Blue Ridge ESOP administrator for more information.
