From an employee standpoint, the ESOP is almost always a better incentive plan than is a profit sharing plan. The philosophy of a profit sharing plan is that if the company makes a profit, a portion of this profit will be shared with the employees, and the employees will thereby have an incentive to maximize company profits. In theory this sounds workable. In practice it is not. In practice, most companies report that little or no employee incentive or motivation is generated as a result of profit sharing contributions. The difficulty is that profit sharing plans are not tangible, and there is no direct link between employee productivity and employee benefits under such a plan.

An ESOP is frequently superior to a profit sharing plan in the following respects:

1. The ESOP creates a direct link between employee benefits and employee productivity. As a consequence, the ESOP is frequently a better employee incentive plan than is a profit sharing plan.
2. In many cases, the employees are not interested in stock market investments, but are interested in owning stock of their own company.
3. In many cases, the company's own stock is a better investment than is the stock market, since smaller firms frequently can maintain a better growth rate than larger firms.

In the ideal case, the ESOP can provide a better employee incentive plan, a better investment result for the employees and also, simultaneously, provide a market for the shareholders of the company.

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