An employee stock ownership plan, or ESOP, could be the key to unlocking a stronger workplace culture and improving your bottom line.
Employee ownership may sound like a novel idea, but it’s a concept that’s been around for decades. The legal groundwork for today’s ESOPs was first laid within the 1974 Employee Retirement Income Security Act (ERISA), and as of 2019 there are roughly 6,600 employee stock ownership plans covering more than 14 million participants in the U.S.
As employers look for new ways to differentiate their benefits programs in a tight labor market, ESOPs are gaining traction. Some of the nation’s top-performing companies are employee-owned, including Publix Super Markets, Amsted Industries, W.L. Gore and Associates , and Davey Tree Expert. In fact, organizations with ESOPs or other employee-ownership plans make up more than half of Fortune Magazine’s 100 Best Companies list year after year, according to esops.org.
ESOPs elevate the whole company
From their positive effects on personal finances to the corporate income tax relief they provide, ESOPs benefit both employers and employees for a variety of reasons.
- More secure retirement: Employee-owners feel better prepared for their retirement. Ninety-one percent of ESOP retirees say they have enough money to retire comfortably, compared to just 49% of non-ESOP retirees. Millennials, many still saddled with student debt, particularly benefit from ESOPs. Two-thirds of millennials working at employee-owned firms expect to retire by age 65 — twice the number of millennials at non employee-owned firms. And 56% of millennial employee-owners had at least six months’ salary saved for retirement, while 66% of non-ESOP millennials had no savings at all.
- Higher profits: Employee-owned firms have higher profits compared to their shareholder-owned counterparts — in good times and bad. Since the ESOP Association’s annual Economic Performance Survey began in 2000, ESOP respondents have seen profit increases every year except 2002 and 2010, which correlate to economic downturns. But even in those bad years, at least 29% of ESOP respondents reported profits and/or revenue increases, indicating a resilience in weathering tough times. Those profits spread to employees. Three-quarters of ESOP respondents increased wages at or above the national average of 2.7%, and 29% increased wages by 4% or more.
- Tax savings: ESOPs enjoy several significant tax benefits. Company owners who sell to ESOPs can defer some of their capital gains. Company cash and stock contributions are tax-deductible. Employees’ tax on contributions to the ESOP are deferred until retirement. Organizations with 100% S Corporation ESOPs pay no federal corporate income tax, an incentive introduced by Congress to encourage employee ownership. The additional cash flow created from tax relief helps support business innovation, growth, and investment.
- Culture of ownership: Most importantly, employee-owners help foster a unique culture of stewardship and accountability that differs from those at stakeholder-owned companies. It’s simple, really: Employees are more driven when the success of the company directly impacts their earnings. This culture of ownership likely contributes to the lower rates of layoffs and turnover at ESOP companies.