ESOPs: A Path To Increasing a Company’s Sales, Profitability, Employee Satisfaction and Job SecuritySeptember 2014 – Articles For Your Benefit
On numerous occasions, both in this forum and elsewhere, I have extoled the benefits of Employee Stock Ownership Plans (ESOPs). By and large, however, I have focused on the tax benefits to the company and to the selling shareholders. While these benefits are significant, the benefits to the employees and the company in terms of the potential for future growth, profitability and employee retention are often overlooked. This is unfortunate, because numerous studies have shown that ESOP companies tend to be more profitable, more likely to weather economic downturns and more likely to retain and grow their workforce. These claims are supported by numerous studies as well as anecdotal experiences with ESOP companies.
Growth in Sales and Profitability
One of the largest studies was conducted in 2000 by Rutgers University. The study analyzed 343 ESOP companies, comparing them to the performance of non-ESOP companies in the same industry and geographical region, of similar size and character. The results showed that ESOPs increase sales, employment and sales per employee by about 2.3 percent to 2.4 percent per year over what would have been expected absent an ESOP. The results also showed that ESOP companies perform better in the post-ESOP period than their pre-ESOP performance would have predicted.
The first study to show a linkage between ESOPs and increased profitability was conducted in 1986 by the National Center for Employee Ownership. The study compared the difference between pre-ESOP and post-ESOP performance and found that ESOP companies had sales growth rates 3.4 percent per year higher and employment growth rates 3.8 percent per year higher in the post-ESOP period than would have been expected based on pre-ESOP performance. When the companies were divided into three groups based on the level of employee participation in management, only companies with a high level of employee participation showed a gain.
The findings in this study were confirmed by a 1987 Government Accounting Office (GAO) “before and after study” using a similar methodology but covering 110 firms and focusing on productivity and profitability. The GAO study found that ESOPs had no impact on profits but that actively managed employee ownership firms increased their productivity growth rate by 52 percent per year. In other words, if a company’s productivity growth rate were 3 percent per year, it would be 4.5 percent after an ESOP. However, this study was criticized as being overly conservative because it assumed no overall increase in employee compensation after the ESOP, which is generally not the case.
Workplace and Job Satisfaction
The most significant job satisfaction statistics relating to ESOP companies were compiled by the Great Place to Work Institute, which is the organization that produces the “100 Best Companies to Work for in America.” It is perhaps the largest database ever compiled on employee attitudes, organizational culture and company outcomes addressing employee stock ownership. The information compiled includes the 780 firms that applied to the “100 Best Companies to Work for in America” competition from 2005 to 2007. More in-depth results were gathered from 200-300 randomly chosen workers within each company and a workplace culture assessment was conducted by the Institute for 400 of the companies. Almost 17 percent of the companies had an ESOP and 9.1 percent were majority employee owned. The result is nothing short of astonishing, when considering that there are less than 12,000 ESOPs in the country and many are sponsored by publicly traded companies. The bottom line is that ESOP companies, especially majority-owned ESOPs, are vastly overrepresented, both in applicants and winners, in these best companies to work, for compared to their representation in similarly sized companies.
Employee Compensation Levels and Job Security
A 1998 study by the Washington Department of Community, Trade and Economic Development and Adria Scharf of the University of Washington shows that employees are significantly better compensated in ESOP companies than are employees in comparable non-ESOP companies. Using 1995 employment and wage data from the Washington State Employment Security Department and 1995 data on retirement benefits from a survey of companies and pension Form 5500, the study compared 102 ESOP companies with 499 companies of comparable industries, business and employment size. The median hourly wage in the ESOP firms was 5 percent to 12 percent higher than the median hourly wage in the comparable non-ESOP companies. The study found the average value of all retirement benefits in ESOP companies was equal to $32,213, with an average value in the comparison companies of about $12,735. In addition, the average corporate contribution per employee per year was between 9.6 percent and 10.8 percent of pay per year, depending on how it is measured. In non-ESOP companies, it was between 2.8 percent and 3.0 percent.
In a 2010 project funded by the Employee Ownership Foundation, the National Center for Employee Ownership (NCEO) did an extensive analysis of ESOP companies using data from the U.S. Department of Labor Form 5500 reports. Unlike prior research, the study carefully compiled data from multiple plans within a single company. It was also not a sample. They looked at every ESOP company for which data was available compared to all retirement plans. The study found that ESOP companies are more likely to offer a second defined contribution plan than non-ESOP companies are to offer any defined contribution plan at all (56 percent compared to 47 percent). Considering only defined contribution assets originally contributed by the company, ESOP participants have approximately 2.2 times as much in their accounts as participants in comparable non-ESOP companies with defined contributions plans and 20 percent more assets overall. The average ESOP company contributed $4,443 per active participant to its ESOP vs. the average non-ESOP company with a 401(k) and/or profit-sharing plan, which contributed $2,533 per active participant to its primary plan that year. In other words, on average, ESOP companies contributed 75 percent more to their ESOPs than other companies contributed to their primary 401(k) or profit-sharing plan.
ESOP and broad-based equity plan companies are also less likely to lay off employees. The 2010 General Social Survey found that 3 percent of employees with employee stock ownership were laid off in 2009-2010 compared to a 12 percent rate for employees without employee stock ownership. In 2006, the numbers were 2.3 percent compared to 8.6 percent and in 2002, 12.1 percent and 2.6 percent. The estimated cost in saved unemployment benefits and foregone taxes to the federal government varied between $8 billion in non-recession years to $13 billion in recession years. The difference between ESOP and non-ESOP companies in this regard is staggering.
The foregoing studies and reams of anecdotal evidence paint a compelling picture. ESOP companies with employee participation are more profitable, grow faster, are more likely to weather economic reversals, pay better and lay off fewer employees. Any business owner seeking to achieve better results and wanting to attract and hold quality employees is well advised to consider an ESOP.
For more information regarding this topic, please contact Harvey M. Katz at (212) 878.7976 or [email protected] or any member of the Fox Rothschild LLP Employee Benefits and Compensation Planning Practice Group .