Just over three years ago, New Belgium Brewing Co., the fourth largest craft brewery in the country, announced that it had become 100% employee-owned. The CEO and co-founder of the company has spoken about the decision many times since the announcement, saying that “there are few times in life where you get to make choices that will have a multi-generational impact.” New Belgium’s decision to transition into a 100% Employee Stock Ownership Plan (ESOP) structure is a shining example of how the leadership in companies can make positive decisions that impact both society at large and the company’s employees.

But what exactly does being 100% employee-owned mean and how does it impact the day-to-day lives of the company’s employees? Since New Belgium’s transition, many other Front Range-based companies, craft breweries especially, have followed suit and structured the ownership of their shares in a similar fashion. However, the general public’s knowledge and understanding of what an ESOP is and how it can impact a company’s culture seems to be quite limited.

At its core, an ESOP is a corporate finance structure that provides tax benefits to a company, which allows its employees to buy stock directly, be given stock as part of a bonus plan, or obtain stock through a profit sharing plan. A trust account is established and the company contributes new shares of its stock to the account. Shares held in the ESOP trust are then distributed to individual employee accounts on the basis of some agreed-upon formula. Employees benefit because they do not pay income tax on the contributions made to their individual accounts until the funds are actually used. Similar to a 401(k) account, an ESOP is subject to a penalty for withdrawal of the funds before a normal retirement age. The ESOP, in sum, provides a tax-beneficial way for a company to sell shares of an existing owner to employees, while providing employees with an additional type of retirement savings vehicle. The ESOP also gives employees an incentive to ensure that the company is running well and that its share price remains high.

With every employee invested in the financial health of the company, the hope is that a culture that fosters teamwork and commitment will result. Thus, ESOPs can be an effective way to keep employees engaged while rewarding them with a nontraditional source of compensation.