When companies participate in an Employee Stock Ownership Plan (ESOP), the results are fairly conclusive. A Rutgers University comparison of benefits between ESOPs and non-ESOPs shows that employee ownership plans are financially beneficial for workers. Individuals who participate in ESOPs are likely to reap greater financial rewards than those whose employer plans are the traditional 401(k).
Research published by the House of Representatives’ Committee on Employee Relations found large benefits come to companies that use employee ownership. Some benefits include higher growth rates, higher rates of firm survival, and notably a 4-5 percent ongoing increase in productivity from employees. The researchers concluded that firms compete more effectively when at least part of the ownership team is made up of employee owners.
What is the impact of ESOP plans on growth? The National Center for Employee Ownership (NCEO) concluded that ESOP companies on average create new jobs and hire new employees at rates three times faster than the national average. Tax code changes which began to be voted in during the early 1980s and late 1990s to incentivize ESOPs have been effective in growing the number of employee ownership companies which now employ about 15 million Americans.
The reality of the advantages that ESOPs present does not mean that they are immune to failure and that employees do not need to be protected. Managing risks around employees having too many eggs in one basket will require creative solutions. Should employees have their employment and the basis of their main retirement plan tied to one employer? While the answer may sound counter-intuitive, in the US, because of tax advantages, the answer is probably “yes.” But there are better ways that Employee Stock Ownership Plans could be structured.
We have a proposal that would enfranchise employee owners and reduce the risk of them losing everything if their company is liquidated. Instead of just owning stock in their own workplace, employees could own stock in many employee-owned firms, as part of an employee-owned mutual fund. This isn’t technically the right terminology. But, mutual fund is the best alternative available at the moment.
Recent trends in ESOPs reported by the NCEO would make the creation of these mutual funds fairly easy. A recent report by the Wall Street Journal concluded that about half of all ESOP companies in America are completely or majorly owned by employees. Or, in other words, about 6 million Americans are employed by fellow employees and themselves. It would be a simple step for the stock in entirely employee-owned companies to be the basis for the mutual funds. The creation of the funds would require no new legislation or regulation, assuming that the correct language was used to describe the new entities. They could be very profitable because they would operate almost tax-free and could grow by absorbing employee-owned stock or purchasing stock in other industries to diversify.
Would it be fair to ask employee owners of successful high-growth companies to participate in a mutual fund made up of employee-owned companies that might include some less profitable firms that grew more slowly? They might gain more financially as owners of an independent, smaller ESOP. Again, I think the answer is “yes.” A mutual fund would protect them from a diversification perspective. Also, it is time that more people accept the argument that, by helping others through business, they are serving in a very effective way. Workers from slow-growth and low-profitability industries such as the grocery sector deserve the support of employee owners from investment banking and high tech sectors. Employee-owners from popular industries should gain a great deal of satisfaction from serving workers and their families from other less lucrative sectors.
No doubt, there is a risk of employee-owned mutual funds being less productive than a bunch of independent ESOPs. But, it is an experiment worth conducting.
Helping our society progress towards less economic inequality may take time and sacrifices. But potential challenges should not stop an experiment from starting. Economic inequality in America is a real issue and ESOP mutual funds are one way to address the problem.
Go to the Aspen Institute’s curriculum library on Employee Ownership and download this syllabus: Act Now