George Clason, in his classic book titled “The Richest Man in Babylon,” wrote this line: “A part of all I earned was mine to keep.” In the 1950s, a lawyer named Louis Kelso coined the term “Employee Stock Ownership Plan” (ESOP). The intent of ESOPs is to significantly increase employee incentives and productivity, while giving employees an additional source of financial assets, or savings. Kelso was driven by the notion that there was no one better to offer company shares to than employees. For many companies, an ESOP has already been the answer to converting employees into passionate contributors and allowing them to have a means of saving for the future.
I won’t dwell on this. But, if Clason is right, those of us who own companies have a special means through which to save. He seemingly did not have a second meaning in mind, although he makes me think we may also owe our success to our maker. Then again, perhaps there is a third interpretation. Maybe those of us who own big companies need to acknowledge that any big success we may have had in business has come largely as a result of our employees. If this is true, we may need to reward them with some degree of ownership.
ESOPs are employee benefit plans currently covering nearly 14 million employees in the U.S. Many believe the strongest argument for these plans stems from the notion that ESOPs lead to forced savings for employees. This can be very important, when it is reported that 56 percent of Americans have less than $10,000 saved for retirement, and 42 percent of millennials have not even begun saving for their later years.
The obvious absence of savings indicates that just the mere step of starting to prepare for retirement is a significant barrier for many people. Could an ESOP start a small yet steady savings option for retirement and turn our population’s futures right-side up? With the implementation of an ESOP, employees are essentially forced into saving because the share allocations come as long as the employees are employed and as long as there is stock left to give to the workers — employees don’t need to decide whether or how much to contribute. For this reason alone, the savings potential is much higher; in addition, the allocations often amount to a higher percentage of an employee owners’ salary than contributions to a normal retirement plan, such as a 401(k) would. Of course, the employees get all of their salary as well. But, most importantly, ESOP companies are somewhat more likely to offer secondary retirement plans than conventional companies are to offer any plan.
The ESOP is an economic model that is slowly taking root in the U.S. economy. In theory, the idea of employees receiving ownership in their company suggests an economic model that could increase employee retention ratios and bring companies closer to their overarching goals. Yet the most revolutionary consequence of the ESOP might be to pull our nation out of the potential fateful future of employees working for 50 years, intending to retire at 70, and having a bare savings account to withdraw from.
Should more companies apply what Louis Kelso described, by focusing on valuing their employees as respectable partners instead of paid labor? I think so. ESOPs lighten the burden of an economic system that is dominated by a minority. They have the ability to bring greater productivity to an economy that has recently seen little increase in output per person. In the end, employee ownership is right because it honors the dignity of those who work for our companies and create much of the value.
John Hoffmire is director of the Impact Bond Fund at Saïd Business School at Oxford University and directs the Center on Business and Poverty at the Wisconsin School of Business at UW-Madison. He runs Progress Through Business, a nonprofit group promoting economic development.