Does Employee Ownership Work?

By Upendra Chivukula and Veny W. Musum – March 23, 2016

Today, almost 50% of Americans own zero capital wealth. With the already manifest discontent all over the country, this fact is an ominous recipe for even wider, much more serious future levels of unrest. However, there is a solution. Shared employee ownership via Employee Stock Ownership Plans (ESOPs) are a proven and overwhelmingly successful route that could be the perfect economic and social antidote resulting in a win for all parties involved.

Let’s dive in deeper and ask:

• Is it good for employees?
• Is it good for companies?
• Is it good for society?
• Is it good for owners?

Good for employees?

In ESOP companies, employees have about 2.5 times the retirement assets of comparable non-ESOP employees. The average account balance among ESOP association members is $113,318. Best yet, in ESOPs, even salaries are somewhat higher.

Regarding ESOPs and retirement, the National Center for Employee Ownership (NCEO) analysis of its members report they are even 56% more likely to participate in a second retirement plan for their employees as comparable non-ESOP participants. The same report showed that company contributed assets to retirement plans in ESOP companies are 2.2 times greater than company-contributed assets to retirement plans in non-ESOP companies.

As far as worker pay and ESOPs, a 1998 Washington State study found that the median hourly wage in the ESOP firms was 5% to 12% higher than the median hourly wage in the comparison companies.

Also, it’s important to realize employee owners are much less likely to be laid off. Data from the 2002, 2006, and 2010 General Social Survey show that people who participate in employee ownership plans are one-third to one-fourth as likely to be laid off as employees not in these plans.

Good for companies?

Studies show rates of growth in private companies go up significantly after ESOPs are introduced while in public companies, most, but not all show a modest positive impact. The key element of note is ESOPs contribute to better performance only where there is already a culture of high employee involvement.

In a landmark 2000 study of all ESOPs over 1994 to 1998—by Joseph Blasi and Douglas Kruse of Rutgers—they compared how private ESOP companies did relative to their competitors before and after an ESOP started. Post-ESOP growth was about 2.5% per year better in sales, employment, and productivity than expected compared to performance metrics of peers before the ESOP. It’s clear, employee’s owning a share in the companies they work for can indeed drive growth.

It’s a win for sales too. In the 2008 Brent Kramer Study 328 majority ESOP-owned companies had sales per employee that are 8.8% greater than comparable non-ESOP companies. In addition to this, a 2012 National Bureau of Economic Research study looking at 780 companies that applied to be on the Fortune Best 100 Companies to Work for List found that being a majority ESOP lowered turnover intention by more than any other incentive plan or other organizational feature analyzed.

But it’s not all good news. Some companies abuse employee ownership. For example, Enron’s employee personal savings were funding the company’s 401(k) plan, which was heavily invested in Enron stock. An ESOP should be funded by the corporation, not the employees.

It is also important to note that both ownership and involvement are needed; just one or the other is not enough. That’s why it is critical to have an ownership culture.

What is an ownership culture? Essentially it is a “company of business-people” where people understand what employee ownership is and how it works. Information about financials, quality, productivity, and other corporate goals is widely shared. Employees have meaningful and regular opportunities to share their ideas and information about how to make the company better—core company values guide employee behavior.

Good for society?

The multi-faceted societal conundrum is that real wages have been almost stagnant for over 40 years. Add to that, retirement savings for most are woefully inadequate and a major looming challenge for the current and future generations. Nevertheless, during the same time frame capital returns have grown substantially. The obvious solution is employees must have at least some capital wealth via ownership equity in the place they work if they want any chance at maintaining their standard of living.

The overall good news is employee owned firms generate more jobs and are less likely to close. Based on the General Social Survey Data noted earlier, the NCEO calculated that the lower unemployment costs of ESOPs saved the federal government $13.7 billion in 2010 and $8.1 billion in nonrecession years in unemployment costs and foregone taxes. So, encouraging widespread broad-based equity sharing just makes for good, dare we say, enlightened public policy.

Good for owners?

As noted, public company ESOPs have an ambiguous, if generally slightly positive, effect on corporate performance, although some data indicate ESOPs may be a good proxy for good management practices.

ESOPs provide owners of closely held companies with a tax-favored way for transition that also often meets their personal nonfinancial objectives.

So why is it not more common?

ESOPs are still not as well-known as they should be. And though they seem complex to many people, there are excellent consultants in the field, across the country. Some may doubt the ESOP path and feel employee involvement seems “squishy” as path to corporate success. The data shows otherwise.

American corporate culture and labor/management relations can become more cooperative than confrontational if the vision is there to do so. One must realize what may be good for the company overall may also be good for top management if they embrace a culture of shared prosperity. Moreover, they must know that the effort to create a team oriented approach will yield good results if they take an “all in” concept coupling both ownership and involvement by everyone, for everyone. So are ESOPs a win-win?

Possibly. The individual employees win because they will share in the wealth producing equity/stock of the companies they work for. Participating corporations win because they call for an intelligent, equivalent/significant cut in counterproductive corporate taxes—and they get the best, highly motivated employees who in, virtually, every case help every business metric improve. The government/society wins, because if done properly, implementing ESOPs results in no loss of revenue, lifts the middle and lower classes, cuts social costs, cuts unemployment, and boosts the economy!