All Posts tagged benefits of esops

ESOPs Make Very Good Business Sense

It has been common knowledge for quite some time that ESOPs (Employee Stock Ownership Plans) make very good business sense. This statement is backed up by research.  Study after study has shown that businesses which are employee owned usually have a definite advantage over those that are not.

ESOPs are essentially retirement plans in which a trust that forms the legal structure of an ESOP purchases employer stock of the company sponsoring the ESOP. Most ESOPs are leveraged, which means that the ESOP is allowed to borrow money to finance its purchase of employer stock.  Loan payments made by the ESOP are funded through employer contributions to the ESOP, much like a company would contribute to a 401(k) or profit-sharing plan.

Let’s took a quick look at recent major research on ESOPs since they first were conceptualized and implemented by Louis Kelso in 1956:

National Center for Employee Ownership (NCEO) Study, 1986

A first look at how employee ownership impacts corporate performance, this study by Michael Quarrey and Corey Rosen of the NCEO tracked company performance for a period five years before and five years after the creation of an ESOP.  The key findings:

  • ESOP companies had annual sales growth rates that were 3.4% higher and annual employment growth rates 3.8% higher in their post-ESOP periods than would have been expected based on pre-ESOP performances.

U.S. General Accounting Office (GAO) Study, 1987

Another “before and after” look at employee-owned firms, the GAO survey was a bit controversial because of an assumption in its research methodology.  However, its conclusions again pointed favorably towards the net benefits of ESOPs:

  • An ownership culture is key to increased productivity in an ESOP company.  Participatively managed employee-owned firms increased their annual productivity growth rate by 52%.  For example, what would have been a 10% annual growth rate became a 15% growth rate in an ESOP company in which there existed a strong ownership culture, i.e. one in which a broad base of employees feel empowered as co-owners.

Washington State Department of Community, Trade, and Economic Development/University of Washington Study, 1998

Peter Kardas, Jim Keogh, and Adria Scharf found that substituting stock for wages or benefits can have a very positive impact.  Their study found that employees are significantly better compensated in ESOP companies than are employees in comparable non-ESOP companies.  The key findings:

  • The median hourly wage in the ESOP firms was 5% to 12% higher than the median hourly wage in the comparison companies.
  • The average value of all retirement benefits in ESOP companies was equal to $32,213, with an average value in the comparison companies of only about $12,735.
  • The average corporate contribution per employee per year was between 9.6% and 10.8% of annual pay, depending on how it is measured. In non-ESOP companies, this measure was only between 2.8% and 3.0%.

Rutgers University Study, 2000

One of the most significant studies to date on ESOPs, the Rutgers study looked at the performance of ESOPs in closely held companies.  The researchers, Douglas Kruse and Joseph Blasi, looked at sales, employment, and sales per employee for ESOP firms and comparable non-ESOP firms.  The key findings:

  • ESOPs increase sales, employment, and sales per employee by about 2.3% to 2.4% per year over what would have been expected without an ESOP.
  • ESOP companies were also somewhat more likely to be in business several years later.

Brent Kramer Study, 2008

Brent Kramer’s study, “Employee Ownership and Participation Effects on Firm Outcomes,” pointed again to the positive impact of employee ownership.  Matching 328 majority ESOP-owned companies to 328 non-ESOP companies of similar sizes and from similar industries, Kramer found that:

  • ESOPs had sales per employee that were 8.8% greater than in the comparable non-ESOP companies.

Alex Brill Study, 2012

A former advisor to the Simpson-Bowles deficit reduction commission, Alex Brill analyzed the ten-year performance of S-Corporation ESOP companies.  His assessment indicates that ESOPs clearly increase employment opportunities.  The key findings:

  • S-ESOP companies showed substantially more employment growth in the pre-2008 recession period than non-ESOP businesses.
  • S-ESOP companies regained momentum faster than other private firms after the recession.
  • S-ESOP companies in the manufacturing sector particularly benefited from the S-ESOP business structure, which buffered manufacturers through the recent, especially challenging economic times.

These studies provide a drum beat of evidence that ESOPs make very good business sense.  Most well-managed employee-owned companies, those which allow their employees an active role in the firm, realize higher sales and profit levels, are more productive, and create more widespread wealth than comparable non-employee-owned companies.

Information contained in this blog came from the NCEO, ESCA, and The ESOP Association.