In another blog post by Acclaro, we looked at why ESOPs (employee stock ownership plans) make very good business sense. Today’s post provides an addendum and explores why ESOPs provide a higher rate of return to employees than do other retirement plans.
There has been much written lately about how ESOP companies have fared better during the latest recessionary period than their comparable non-ESOP counterparts. A recent study published by Douglas Kruse and Joseph Blasi of Rutgers University found that ESOPs increase sales, employment, and sales per employee by approximately 2.3% to 2.4% per year over what would have been expected absent an ESOP. In addition, Kruse and Blasi found that ESOP companies were somewhat more likely to still be in business several years later and were much more likely to offer other kinds of retirement plans. This last finding flies in the face of conventional wisdom held by economists through the years that ESOPs must be a tradeoff for other wages or benefits. That is, it is commonly assumed that they must be a substitution for other retirement plans or employee benefits. Kruse and Blasi found that the introduction of an ESOP into a company was an overall net addition, not a substitution, to the company’s employee benefits offerings.
Another recent study also highlighted the attractiveness of an ESOP as a retirement plan. The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) compiled statistics in 2012 on 401(k)s and other retirement plans and found that ESOPs provided higher aggregate rates of return than 401(k) plans. EBSA took a look at retirement plans with 100 or more participants from 1996 to 2010 and found that ESOPs provided, on average, a 12.9% higher return to an employee’s overall retirement plan than 401(k) plans.
As good as the results are in the various studies conducted in the last 10 years which point to the “ESOP advantage,” the performance metrics gleaned from the studies really get a bounce when an ESOP company puts particular stress on participative management. In other words, performance results for ESOP companies which actively encourage management participation by its employee-owners are superior to the operating results of those ESOP companies where management participation is not encouraged. Specifically, employee influences on new products, work design, and marketing were strongly correlated to performance outcomes such as total sales and earnings. In other words, as employees became more directly involved with decisions regarding the details of work design, the design and implementation of new products and marketing campaigns, company performance improved.
This point is corroborated by another study, published by the Great Place to Work Institute which conducts the annual “100 Best Companies to Work For in America” competition, which showed that an ESOP alone has a very limited impact on the sponsor company’s financial performance (as measured by the Return on Assets ratio) but, when combined with high employee engagement (participative management) scores, an ESOP has a significant impact on a Company’s total sales and earnings.
The research by the Department of Labor shows that ESOPs have provided a higher rate of return to employee-owners than have 401(k) plans. Not only do ESOPs make great business sense, but they can prove to be a great retirement investment, as well.