How ESOPS Benefit Employers and Employees

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!

ESOP – An Excellent First-Resort

ESOP – An Excellent First-Resort

As business owners, there is a lot to consider when mapping out future retirement and succession plans. Between 401(k)s, Individual Retirement Arrangements (IRAs), Employee Stock Ownership Plans (ESOPs) and other similar options, weighing the advantages and disadvantages of each one is critical. While plans such as 401(k)s and IRAs are most common, there is still a large knowledge gap when it comes to ESOPs – and because of this, the ESOP option frequently gets overlooked or viewed as a ‘last-resort.’

With that said, let’s dive into some of the great benefits that ESOPs bring to both employers and employees, and discuss why ESOPs should truly be viewed as a first-resort.

For starters – what is an ESOP?

To keep it simple, companies that launch an ESOP form a trust that purchases some or all of the company’s shares and holds them in retirement accounts for employees. As the stock value increases or decreases over time, so too does the value of the employees’ accounts.

The two main reasons why ESOPs are such beneficial alternatives to the other succession plans out there are as follows:

  1. ESOPs increase employee engagement, thus improving the company’s overall performance
  2. ESOPs offer potentially compelling benefits at the time of sale

Employee Engagement

In terms of employee engagement, studies have shown that employees who participate in an ESOP are more motivated to perform at a higher level than those who do not participate in an ESOP. Research in a study conducted on the effects of ESOP adoption and employee ownership at the University of Pennsylvania showed that individual employee-owners have increased job satisfaction, organizational commitment, motivation and workplace participation. Employee ownership has also been shown to result in increased firm productivity, profitability and longevity.  In the largest study on the performance of employee stock ownership plans, Joseph Blasi and Douglas Kruse found that overall, productivity increased by 4% in companies who participate in an ESOP. The National Center for Employee Ownership also found that on average, employee-owners have retirement accounts that are 2.2x larger than those in traditionally owned companies.

hands together for employee engagement

Compelling Benefits

The second reason why ESOPs are a great option for business owners is the increased optionality. When the time comes to sell a business, ESOPs give business owners more than one solution to a very complex situation. One example of this can be seen through the decision Dansko, a popular manufacturer of shoes, made to become an employee owned company. When owner Mandy Cabot made the decision to sell her company, she was presented with an offer from Timberland, another massive name in the industry. While the deal offered an attractive price tag and additional benefits like added R&D for Dansko, ultimately Mandy sold her shares to an ESOP. Instead of an outside company running her business, the employee owners who have been ingrained in Dansko’s roots for so long, will continue on with their original commitment to employees, community, and values.

“In any business, employees are the life-blood, they ARE the business,” Mandy said. “Through our employees, Dansko will learn, evolve, and regenerate itself virtually forever.”

Misconceptions of ESOPs

With these benefits laid out on the table, what then gets in the way of owners looking to implement this viable option? Here are some of the major misconceptions surrounding ESOPs:

  1. An owner may not get fair market value by selling to an ESOP – It is true that an ESOP cannot pay MORE than a business’ fair market value – thus, an owner will not be walking away with an offer from the highest bidder. However, the ESOP can pay every dollar of fair market value determined by a market evaluation exercise.
  2. Owners lose operating control of their companies when they create an ESOP – This is also not true. While employee-owners will observe management decisions and strategies to grow the value of the company, ESOP members don’t manage operations.
  3. ESOPs are too complex – Although there are more nuances when it comes to setting up an ESOP, ESOPs are structured under U.S. law as an employee retirement plan. There are many financial advisors out there who are experts on the ins and outs of ESOPs.

In the end, some retirement options may be better suited for certain companies and firms – but at the least, be sure to evaluate the tangible benefits of an ESOP.

Tata & Howard logo

Tata & Howard adopted an Employee Stock Ownership Plan in October of 2014 to ensure future success of the company. As a result, Tata & Howard employees own 100% of the company through their ESOP. Since becoming an ESOP company, Tata & Howard still upholds the same core mission and values of teamwork, efficient solutions, client satisfaction, integrity, and positive attitude, originally established more than 27 years ago.