ESOP Returns Outpace S&P 500

Equity returns on employee stock ownership plans have outpaced those of the S&P 500 and Russell 2000 indexes, according to the inaugural Stout ESOP Index, published on October 30 by the global advisory firm Stout Risius Ross LLC.

“ESOPs, qualified retirement plans that give workers ownership interest in their company in the form of shares of stock, have long been viewed as tools for employee engagement and legacy preservation,” said Aziz El-Tahch, president of Stout’s ESOP advisory practice, in a statement. “What’s striking here is the quantitative validation that these companies can also deliver superior financial results.”

From 2021 through 2024, more than 350 ESOP-owned companies in Stout’s valuation portfolio produced a 17.3% average annual return, surpassing the S&P at 11.9% and the Russell 2000 at 3.1%, the firm reported. Even smaller companies—those with less than $100 million in enterprise value—delivered 15.5%.

Advantages of ESOPs

According to a recent article from law firm Foley & Lardner LLP, co-authored by Jonathan Witt, a partner in the firm, ESOPs have long been attractive for their tax advantages and ability to reward employees, all while preserving a company’s identity.

ESOPs allow companies to “maintain liquidity” and “empower employees,” says Witt. On the cash flow front, companies can avoid selling to a competitor or private equity firm that might finance a portion of the purchase price and saddle the business with debt to repay over a long period of time.

A firm that experiences “sustainable earnings and profitability” could make a prime candidate for an ESOP, adds Spencer Moats, another partner in Foley and co-author of the article. The value of the shares held by the plan—and therefore the “attractiveness of the ESOPs to plan participants”—depends upon the company’s ability to service its debt.

As a tool for employee empowerment, Witt says ESOP ownership enables employees to go from thinking of themselves as “cogs in a machine” to holders of a meaningful ownership stake that could grow their wealth if they stay with the company long-term. According to the ESOP Association, an advocacy group, ESOP adoption is linked with 46% longer average tenure for employees, and 80% of leaders report better recruitment and retention. Like a defined benefit plan, ESOPs typically require only a company contribution.

ESOPs bring tax advantages too, adds Moats. In certain structures, such as a 100% ESOP-owned S corporation, companies can operate largely free of federal income tax. There are also no taxes passed through to shareholders, and in some states, ESOP returns are exempt from state income tax as well, he explains.

Kathleen Dreyfus Bardunias, another Foley partner and article co-author, says ESOPs are the only plans in the retirement space that function as “tax-efficient” ownership transition tools with positive effects on company culture, longevity and overall strategic growth.

While the plans are “proven succession alternatives,” companies have underutilized them due to their “perceived complexity or valuation risk,” Witt says. But the complexity is “nothing insurmountable.”

Complexities and Solutions

Valuation is the “cornerstone” of every ESOP transaction, according to Witt. Deals must be made for “adequate consideration,” which the Department of Labor states as meaning that “the fair market value of the asset as determined in good faith by the trustee or named fiduciary pursuant to the plan’s terms and in accordance with Department of Labor regulations.” Companies may fear litigation alleging a lack of proper consideration, Witt explains.

Just days before President Donald Trump’s inauguration in January, the DOL released a new proposed regulation to clarify elements of the term “adequate consideration” regarding ESOPs. The notice of proposed rulemaking as issued in response to a mandate in the SECURE 2.0 Act of 2022 that requires the Secretary of Labor to “issue formal guidance on the standards and procedures that are acceptable when establishing good faith fair market value for shares of a business to be acquired by an” ESOP.

As it was created by the DOL under former President Joe Biden, the Trump administration withdrew the proposal later in January.

Another response to the valuation dilemma may lie in Washington. On October 9, the Senate unanimously approved the Retire Through Ownership Act, introduced by Representative Roger Marshall, R-Kansas, which would create a statutory safe harbor for ESOP fiduciaries when determining whether the sale of private company stock to an ESOP is for “adequate consideration.” The bill unanimously passed through the House of Representatives Committee on Education and Workforce in September but has not been taken up by the full chamber.

The Retire Through Ownership Act would give fiduciaries the confidence that if they follow established valuation methods and use certified appraisers, they are on “solid ground,” explains Witt.

A separate ESOP measure, the Employee Ownership Representation Act of 2025, would add two ESOP representatives to the Department of Labor’s ERISA Advisory Council. Currently composed of 15 members from business, labor and the public, the council lacks ESOP representation.

Additionally, Moats says several states have adopted initiatives, such as tax credits, loan programs or grants, to fund either ESOP transactions or evaluation/feasibility studies. Iowa’s ESOP initiative, for instance, provides financial assistance for businesses interested in establishing an ESOP. The Iowa Economic Development Authority reimburses companies for 50% of feasibility study costs, up to a maximum of $25,000, upon successful ESOP formation.

“While these proposals are not yet law, their advancement … underscores the growing bipartisan recognition that ESOPs strengthen domestic competitiveness, safeguard jobs, build employee wealth, and promote long-term economic resilience,” the article stated.