The first ESOP was created in 1956 by a San Francisco lawyer and economist as a way to shift ownership of a long-standing newspaper from its founders to its employees. ESOPs experienced significant growth in the mid-1970s and 1980s when Congress passed legislation allowing business owners who sell to their employees to defer capital gains taxes. Today’s “silver tsunami”—the anticipated retirement of Baby Boomer-era entrepreneurs who together own more than 2.3 million businesses employing nearly 25 million people—has sparked renewed interest in ESOPs as a way for owners to ensure their businesses’ long-term viability. Across the U.S., there are currently 6,669 ESOPs holding nearly $1.3 trillion in assets and benefiting 10.8 million employee-owners, according to the National Center for Employee Ownership.
Potential Impact
ESOPs offer a way to create quality jobs that enable workers to build wealth. Employees in ESOPs on average earn 5 to 12 percent more in wages, and receive more benefits and retirement income, than their counterparts at traditional firms. During economic downturns, ESOPs have laid off 25 percent fewer workers than traditional firms. Because employee-owned businesses have greater productivity and growth, and lower failure rates, than traditionally structured firms, they also more effectively contribute to the stability and strength of neighborhood economies. Communities also benefit from ESOPs because their workforce typically lives in the same community in which the business is based; that makes them less likely to relocate or rely on practices harmful to the environment. With the imminent retirement of over 2 million U.S. businesses owners, ESOPs also hold the unique potential of saving thousands of local businesses while boosting their workers’ job quality and ensuring their previous owners’ financial security.
ESOPs are not controlled by absentee shareholders or others disconnected from the life-blood of a business—its workers. Many ESOPs provide opportunities for workers to participate in decision-making processes, a factor linked to increased job satisfaction as well as higher business profits and productivity. As ownership is vested in workers who often reside in the community, the model inherently fosters greater community control of local assets. ESOPs also benefit from a range of tax incentives that enable ESOP-owned businesses to have more resources available to invest in the growth and success of the enterprise and make ESOPs an attractive way for owners who want to exit their business to aid the rapid scale-up of employee ownership in the economy. That, in turn, enables employees to build lasting wealth through ownership of the company that is prospering through their labor.
Challenges
ESOPs remain a model with which most business owners are not familiar. Owners, particularly those nearing retirement, need significant education to help them recognize the benefits that selling to employees offers. The cost of setting up and administering an ESOP—estimated at around $50,000—is often cost-prohibitive for businesses with fewer than 30 employees. Without proper safeguards, an outsider can offer to buy ESOP shares, and the board’s fiduciary responsibilities may render it powerless to reject the offer. Finally, while setting up an ESOP provides a key alternative to absentee capital ownership of the workplace, it does not automatically by itself make a workplace more democratic in its decision-making.
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