ESOP Growth a Roller Coaster Ride Since Inception

June 25, 2007 ( - A publication by the Federal Reserve Bank of Minneapolis discusses research that shows employee stock ownership plans (ESOPs) have ridden a wave of growth and stagnation since their inception.

According to the article, data from the National Center for Employee Ownership (NCEO), shows 9,000 ESOPs in the early 1990s, with that number falling to 7,700 plans in 2000 and climbing again to 9,225 plans in 2005.

The number of firms that are majority-owned by their ESOP is now estimated to be about 2,500, and roughly a thousand firms are believed to be 100% ESOP-owned. Today, about 10 million employees participate in an ESOP, or about one of every 11 workers in the private sector, the article said.

While some argue that ESOPs are a method of sharing the capitalism, many companies implement the plans because of a belief that it encourages worker productivity and helps the business’s bottom line. A 2006 survey by the Employee Ownership Foundation found 91% of 426 responding companies said creating their ESOP was a good business decision that helped the company, the Federal Reserve article pointed out. Almost three-quarters also reported that their company stock outperformed three major stock indexes in 2005.

The previous annual Employee Ownership Foundation survey found that 82% of respondents said their ESOP improved worker motivation and productivity.

The article also said in 2002 testimony before the U.S. House Subcommittee on Employer-Employee Relations, Douglas Kruse of Rutgers University told congressional members that “25 years of research shows that employee ownership often leads to higher-performing workplaces and better compensation and worklives for employees,” according to the article.

Federal Reserve of Minneapolis noted that in a 2003 National Bureau of Economic Research (NBER) working paper authored by,Kruse, Joseph Blasi and five others, research showed that “employee ownership firms tend to match or exceed the performance of other similar firms on average.” The authors also suggested that average productivity could be as much as 5% higher at employee-owned firms.

According to the article, a current project is aimed at looking more in depth at the problems with ESOPs, including the phenomenon called “shirking” (not all employees carry their weight equally) and the financial problem of lack of diversity of investments for those employees in an ESOP.

However, using data from the Shared Capitalism project in a paper for the annual conference of the Labor and Employment Relations Association by Robert Buchele of Smith College, Loren Rodgers from NCEO and Adria Sharf of the University of Washington noted that “while far from adequate from the standpoint of financing retirement, the median pension wealth of ESOP participants is over four times higher than the median household pension wealth, and that company stock ownership in ESOPs, while highly concentrated, is considerably less concentrated than stock ownership.”

The Federal Reserve of Minneapolis’ article – Employee Ownership: Economic Miracle or ESOPs Fable? – is here .