ESOPs a Win-Win for Workers and Employers

Not only do they build employees’ wealth at a faster rate than retirement plans, but they contribute to business performance and resilience.

Not only do employee stock ownership plans (ESOPs) and other forms of employee ownership help build employees’ wealth in a faster and more significant way than regular retirement plans do, but they benefit the companies that offer them as well.

This is according to the “Race and Gender Wealth Equity and Role of Employee Share Ownership” report that outlines these advantages, not to mention how they foster greater equity among minorities, women and other demographics that face income and wealth challenges.

Particularly at a time when diversity, equity and inclusion (DEI) are being viewed as essential to American values, the authors of the paper say, employee share ownership offered can help a company achieve its DEI goals.

“Broadening opportunities to participate in the ownership of business assets can help address this wealth divide and offer working people the opportunity to meaningfully participate in the success of the economy,” according to the report, written by researchers at the Democracy at Work Institute, Economic Opportunities Program | The Aspen Institute, and the Rutgers School of Management and Labor Relations. “In addition, employee share ownership can contribute to business resilience and job retention in communities and play an important part in supporting economic recovery.”

“Too many Americans have too little wealth,” Corey Rosen, founder of the National Center for Employee Ownership, tells PLANSPONSOR. “Just over 20% of all Americans have no wealth at all. Forty percent of Americans cannot cover a financial emergency with available cash, forcing them to need to borrow money, put it on a credit card, raid their retirement accounts (if they have one), or other less than optimal choices.”

The “Employee Share Ownership” report is based on a roundtable discussion held on October 19, 2020, that brought together researchers, philanthropic leaders, policy experts and advocates, the participants said employers can expect new incentives from legislators to encourage employee ownership.

The paper explains how wealth and income are interrelated and how minorities and women may have their savings halted or stopped in their tracks if their incomes are lower than other demographic counterparts. Further, if these groups have not built up stable sources of wealth, such as home equity, and they experience a job loss, this can be all the more devastating.

Sources of Wealth

Besides savings and homeownership, stock and bond ownership, inheritances or retirement accounts, wealth can be brought about through ownership of business assets, the paper says.

Women may build up less wealth than men due to years of staying out of the workforce to raise children or to serve as a caregiver, while “for Black and Latinx individuals and families, structural racism has resulted in stock wealth inequality,” the researchers write. “Like women, Black and Latinx people are often segregated into jobs that offer lower wages, fewer benefits and little chance of advancement. They also face predatory practices, including high-cost and wealth-stripping financial products.”

The report notes that in 2016, in households where the head was between the ages of 32 and 61, 68% of white families had retirement savings accounts—compared to just 35% of Latinx and 41% of Black families. White families had a median retirement savings account of $79,500, while it was a mere $29,200 for Black families and $23,000 for Latinx families. Single women of all races and ethnicities hold, on average, 68% less wealth than their male counterparts.

The Value of Employee Share Ownership

Rutgers estimates that in 2018, nearly 23 million employees, or roughly 19% of all U.S. workers, owned some share in their employer.

Employers can offer employee ownership through ESOPs, employee equity grants, employee stock purchase plans (ESPPs), employee stock option plans, employee ownership trusts and worker cooperatives.

Whatever the method, the impact of employee ownership is profound, according to the report. Employee owners of color have 30% higher wage income than do non-employee owners of color. Women have 17% higher wage income.

Workers in ESOPs have account values ranging from $15,000 to $6 million, with a median value of $165,000, according to the Survey of Consumer Finances. Low- and moderate-income workers between the ages of 60 and 64 had 10-times more wealth compared with the typical American in that age group.

The most common form of employee ownership is ESOPs, Rosen says. There are nearly 7,000 ESOPs in the U.S. with 14 million participants and $1.5 trillion in assets, he says.

“Ninety-five percent of these companies are closely held,” Rosen says. “In many cases, workers in an employee-owned company end up with 2.2 times the retirement assets that they would have otherwise been able to amass at a company with another type of retirement plan. This is particularly noteworthy when you consider that 50% of the private sector workforce has no retirement plan at all.”

ESOPs are a pretty seamless, and a tax-favored way, for a business owner to sell their business and move on, Rosen says. “They give significant tax benefits to the owner along with the opportunity to continue to work at the company in whatever role they choose. The vast majority of business owners don’t know they can do this, even though it is something that is very appealing in a very practical way.”

If employee ownership is paired with empowering employees at all levels, regardless of their status at the company, to contribute ideas on how to run the business better and even develop new business opportunities, services or products, this is where the rubber really meets the road for employee ownership plans to jumpstart businesses, Rosen explains.