WHY YOU SHOULD CONSIDER AN EMPLOYEE STOCK OWNERSHIP PLAN (E.S.O.P.)
BY COREY ROSEN
Baby Boomers will be retiring in record numbers in the coming years — 10,000 per day, by some estimates — and record numbers of businesses will be for sale. In fact, two out of three of all privately held businesses in the US are forecasted to go through an ownership transition in the next five to 20 years. Meanwhile, with unemployment at 4.7 percent, employers need an edge to attract, retain, and motivate the best people. And economic inequality continues to be a seemingly intractable problem. Sharing ownership with employees via an employee stock ownership program (ESOP) is a means of addressing all these issues in a way that is good for owners, companies, and employees. Here’s why.
IT’S YOUR LEGACY. DON’T LET SOMEONE ELSE SPOIL IT
Sure, you may be able to sell your business to a competitor or private equity firm. And they’ll make all kinds of promises about keeping the legacy you have created — and then probably break them. Instead, you could sell to an ESOP. Here is how it works: You set up a trust for employees. The trust can borrow money to buy your shares in a block or you can contribute cash to the trust and buy yourself out over time. If the trust borrows money, the company puts cash into a plan to repay the loan. The trust can borrow from a bank or from the seller. ESOPs have a default rate of 2 per 1,000 per year.
This is not just altruism. All the contributions are pre-tax. You can defer tax on the gains from the sale by reinvesting in other securities. Employees pay nothing. All employees with over 1,000 hours of service must be covered by the plan, and get allocations of stock on an equitable basis such as relative pay. The shares vest over time, and employees sell their shares back to the company when they leave. You can sell all or part of your company, but if you sell 100 percent into an ESOP, the company pays no income tax. You get a fair price, can decide on your future role, and get tax benefits you can’t get any other way.
BROAD-BASED EMPLOYEE OWNERSHIP WORKS
There is now a vast amount of research, including a massive study published by the National Bureau for Economic Research analyzing applicants for the 100 Best Companies to Work For list, which showed that companies that share ownership with most or all employees, whether through ESOPs or broadly granted equity awards, perform significantly better on a variety of dimensions than those with narrower ownership. The effect is magnified if the company has a high-involvement culture and open-book management. Employee ownership companies also have much lower turnover.
CONCENTRATED OWNERSHIP IS NOT CONSCIOUS CAPITALISM
There is a lot of legitimate concern about income inequality, but what about wealth inequality? Those in the top 1 percent don’t just make most of the money, they own a large majority of all productive assets — more than 90 percent. Sharing ownership widely with employees is a way to address these issues. Participants in ESOPs, for instance, have 2.5 times the retirement assets of participants in non-ESOP plans — and their companies make more money. Your employees and you will be better off.
Worker co-ops, though an appealing idea in many ways, have not proven scalable — there are a few hundred worker co-ops, mostly very small. Worker co-ops employ probably less than 25,000 people. ESOPs employ about 13 million, and majority ESOPs employ at least 2 million people. ESOPs are scalable because they are more flexible and have much better tax treatment — they don’t rely purely on altruism to drive change.
Corey Rosen is the founder of the National Center for Employee Ownership, a nonprofit information, membership, and research organization (nceo.org).