Studies have shown that companies that sponsor employee stock ownership plans (ESOPs) see positive results for revenue and employee productivity, but more recent studies show ESOPs provide greater retirement savings for employees and can reduce wealth inequality.
Loren Rodgers, executive director of the National Center for Employee Ownership (NCEO) in San Francisco, says, “It looks like there’s been an uptick in ESOP activity according to our service provider friends.” He says there are segments of the market that have different reasons for offering an ESOP to employees. The No. 1 reason, according to Rodgers, is the seller wants to get ready to retire and isn’t comfortable with a profit maximizer or a competitor taking over the business because he knows at least some of the executive team will lose their jobs and he wants to preserve the legacy of the company.
In another segment, a buyer is hard to find—either the company serves a small niche and there’s not much interest except by employees, or a female or minority-owned business wants to keep it so. The third segment just sees offering an ESOP as a business strategy to make employees owners.
In 2017, the NCEO reported that as of 2014, there were 6,717 ESOPs in the United States, holding total assets of more than $1.3 trillion, and covering more than 14 million participants. According to Rodgers, one reason there are thousands of ESOPs is the sellers get tax benefits—a major tax advantage is sheltering the corporate income from taxes.
ESOPs provide higher retirement savings
In 2018, the NCEO reported that ESOP participants have an average retirement balance of $170,326, more than twice the $80,339 that other workers have saved. Even for ESOP employees making less than $25,000 a year, their balances average $55,526, compared to the $22,447 that their counterparts have saved at other companies.
Rodgers explains that employees have double the retirement savings balance for two reasons: Almost always the ESOP is added to another retirement savings vehicle, and for those using an ESOP as an ownership transition vehicle, they sell shares at a higher price.
In addition, NCEO research finds the larger retirement savings balance may be due in part to a larger than average contribution rate by employers. “On average equities are among the highest performing class of securities, so employees can see a greater growth of assets,” Rodgers says.
In addition, the average tenure for employee owners is about 20% higher than for non-employee owners, NCEO research found.
Rodgers adds that employee-owned companies tend to provide a more generous benefit package overall—health benefits, flex time, parental leave, tuition reimbursement—benefits that help with employee’s financial lives.
Closing the wealth gap
In the first-ever national study of low-income and moderate-income workers at employee-owned companies, researchers discovered ESOPs enable families to significantly increase their assets, shrinking—though not eliminating—gender and racial wealth gaps. The research by the Rutgers Institute for the Study of Employee Ownership and Profit Sharing suggests employee ownership can reduce wealth inequality in the U.S.
According to the study report, “Building the Assets of Low and Moderate Income Workers and their Families: The Role of Employee Ownership,” analysis from the study suggests that employee-owned firms stitch together five specific elements that work in tandem to enable workforce asset building, including: Building ESOP account equity and financial knowledge; Expanding workforce capabilities through on-the-job training, external education, and internal mentoring; Enabling asset preservation and personal investments; Increasing access and inclusion by gender, race and ethnicity; and Improving health and well-being through quality of work life experience and balance.