How ESOPs Benefit Employers and Employees

Part of every successful client-based business is the ability to retain existing clients. In order to retain these clients however, a business needs highly skilled, engaged, and happy employees. When an employee feels valued and can see the positive impacts of their work, they are more inclined to stay on board. With this notion, long-term success is hinged on finding exceptional talent, and training exceptional talent. But in which ways can this be done in such a competitive workforce? One way is to consider implementing an employee stock ownership plan (ESOP) to benefit employers and employees.

An ESOP is a type of retirement plan, similar in some ways to traditional plans like a 401(k). Studies show that ESOP companies grow about 2.5 times as fast as non-ESOP companies. They also are known to provide employees with up to 2.2 times the retirement assets.

Owner Benefits

ESOPs are defined contribution retirement plans that invest primarily in the common stock of the company. It is unique among retirement plans in that it can borrow money. This allows the ESOP to be a flexible succession strategy for a business owner who is looking to sell all or part of their business.

Aside from gains via engaged employees, there are a few reasons why business owners and employers choose to implement ESOPs into their business. For one, if (and when) it comes time for the business owner to sell, the company wouldn’t be thrown into the hands of someone completely unrelated to the business. Instead, selling to the ESOP means that: 

  • the company stays in place
  • the people who’ve helped build it get rewarded
  • the owner has the flexibility in terms of how much to sell and what role they’ll play in the future
  • the company nets substantial tax benefits

Employer Benefits

In the 21st annual survey completed by The Employee Ownership Foundation, ESOPs have been shown to improve overall company performance. The results showed that:

  • 76% of respondents indicated the ESOP positively affected the overall productivity of the employees
  • 70.5% of respondents reported profitability increased and 76.2% of respondents noted revenue increased
  • 80% of respondents stated the company’s stock value increased

Another significant survey conducted by Douglas Kruse and Joseph Blasi of Rutgers University reported that ESOPs increase sales, and sales per employee by 2.3 to 2.4 percent per year.

So how does this happen, just by having an ESOP as opposed to a typical retirement plan like a 401(k)? The bottom line is that an ESOP creates aligned incentives. Through the ESOP, employees earn ownership in the company, which make those eight or nine hours spent at work all the more worthwhile.

Employee Benefits

ESOPs have proven to be just as beneficial for the employees working at the company. When it comes to planning for retirement, employees want to rest assured that they will be financially stable. As such, Corey Rosen, co-founder and senior staff member of the National Center for Employee Ownership, stated that ESOP balances were three to five times higher on average than 401(k) plan balances. 

graphic displaying multiple hands grabbing a piece of the (company) pie

In addition to the financial benefits of an ESOP, there are certainly other perks that make employee owners feel valued and inclined to stay in their company. Firstly, is the notion of job security. ESOPs have been known to have lower turnover rates and are much less likely to lay people off. Secondly, ESOPs have proven to increase the well-being of their employees. Additional benefits include:

  • Greater feelings or job security and satisfaction
  • Increased trust in the management/company

In conclusion, employee stock ownership plans benefit the company, the owners, and the employees. An ESOP can be an excellent strategy for a company looking to enhance organizational performance, help employees prepare for retirement, and allow a business owner to meet succession or diversification goals. Do keep in mind that while all of these statistics may seem compelling, implementing an ESOP is not for every company, and lots of decision making must go into the process. If you are interested in learning more and implementing an ESOP into your business, be sure to do plenty of research!

October is ESOP Month, and T&H has reason to celebrate

The ESOP Association and its member companies have been celebrating Employee Ownership Month every October for over 20 years. The month-long observance aims to celebrate the myriad benefits of employee stock ownership plans (ESOPs) through employee education and team-building events. Tata & Howard celebrated for the first time this year, as October 2015 marks the one-year anniversary of the company becoming a 100% employee-owned company. Throughout the month, T&H employee-owners have been participating in contests, calls to action, and special events in order to celebrate not only ESOP Month, but also the first anniversary.

What is an ESOP?

An ESOP is a program that provides a company’s workforce with an ownership interest, most frequently at no up-front cost to employees. ESOPs are implemented for different purposes, often as a way to provide for the future transfer of ownership of a successful, closely-held private company from owners to employees.

In the United States, ESOPs are a defined contribution plan, which is a form of retirement plan. ESOPs are regulated by Employee Retirement Income Security Act (ERISA), a federal law that establishes minimum standards for retirement plans in private industry and extensive rules on federal income tax effects of employee benefit plans. ERISA was enacted in 1972 to protect the interests of employee investment plan participants.
What Is an ESOP
Infographic by National Center for Employee Ownership (NCEO) from What Is an ESOP?

ESOP Statistics

According to the ESOP Association, ESOPs provide many benefits to employees, some of which are highlighted below:

  • esop_association_logoThere are approximately 10,000 ESOPs in place in the U.S., covering 10.3 million employees (10% of the private sector workforce).
  • About 330 ESOPs (3%) are in publicly traded companies.
  • An estimated 7,000 of the 10,000 companies have ESOPs that are large enough to be a major factor in the corporation’s strategy and culture.
  • Approximately 5,000 ESOP companies are majority-owned by the ESOP.
  • Approximately 4,000 are 100% owned by the ESOP.
  • At least 75.4% of ESOP companies are or were leveraged, meaning they used borrowed funds to acquire the employer securities held by the ESOP trustee.
  • Of the 10,000 employee-owned companies nationwide, fewer than 2% were financially distressed when they established their ESOP.
  • Approximately 99% of ESOP Association members are private, closely-held companies.
  • ESOPs exist primarily in small businesses – 68% of Association members have less than 250 employees.
  • While ESOPs are prevalent in a broad range of industries, approximately 23.4% of Association members are in manufacturing, followed closely by construction (15.3%) and engineering (10.9%).
  • Approximately 65% of ESOP Association members report that their ESOPs have been in place for 10 years or more.
  • 4% of Association members have companies that are more than 50% owned by the ESOP.
  • 6% of Association members offer a supplemental benefit plan in addition to the ESOP including, 401(k) plans, pension plans, and profit sharing plans.
  • Research indicates that ESOP implementation results in more information sharing, increased communications, and involvement in decision making for employee owners.
  • 3% of ESOP Association members report that motivation and productivity increased as a result of the ESOP.
  • Savings from the low layoff rate of ESOP participants was $1.9 billion in 2014, showing that ESOP companies are an investment worth noting.
  • GSS figures released in June 2015 found that 1.3% of employees with employee stock ownership, which includes the ESOP model and other forms of employee ownership, said that they were laid off in the last year compared to a 9.5% rate for employees without employee stock ownership.

T&H employee-owners participated in a bubblegum chewing contest
T&H employee-owners participated in a bubblegum chewing contest

Contrary to some rumors, ESOPs are not typically formed in an attempt to save a struggling company. In fact, the vast majority of ESOPs are formed by highly successful companies. The ESOP only helps to increase company success as it provides incentive for employees to ensure that the company remains prosperous. Employee-owners of ESOPs typically know more operative and financial information about their company than do employees of traditionally held private corporations, and are often more motivated and productive. After all, the more successful the company, the more financial reward to employee-owners.

Tata & Howard’s ESOP Celebration

This month, employee-owners at Tata & Howard have been immersed in ESOP fun and education. To date, employee-owners have participated in a “Guess the Share Price” contest, a “Guess the Labor Revenues per Employee” contest, a bubblegum chewing contest, a hike, and an ESOP Slogan contest. In addition, employee-owners have been treated to chocolate coin bags, Starbucks coffee breaks, and ice cream socials, and have participated in charitable activities such as a month-long food drive and a special donation to Water For People.

T&H employee-owners received their first share certificates on October 19, 2015
T&H employee-owners received their first share certificates on October 19, 2015

Celebrating the 23rd anniversary of Tata & Howard on October 19, 2015, Tata & Howard employee-owners received their first ESOP share certificates, and proved that they are ready for 23 more. Results from an anonymous survey show that Tata & Howard employee-owners overwhelmingly support the formation of the ESOP, and they have also embraced and conquered fun and educational challenges. The shift to an ESOP has been a positive change for Tata & Howard, and we look forward to many more celebratory Octobers. Happy ESOP Month!