Is Employee Owned… a Good Thing?

What’s An ESOP?

Whether you’re head of a large family or small corporation, ownership becomes an increasingly nuanced concept as more people are added to the table. For companies who invest both time and money into an employee-owned company plan or employee stock ownership plan (ESOP) ownership suddenly becomes a shared concept, putting the stakes of the company’s success on the shoulders of the employees. 

Similar to a profit-sharing plan or 401(k), you can think of an ESOP as a type of employee benefit plan. The company sets up a trust fund with tax-deductible shares allocated to employees which is then paid off when they’re bought out or leave the company. 

Employees own a portion of the company, which take the form of stock options (which are either bought directly, given as a bonus, or obtained through a profit-sharing plan), while employers gain access to massive tax breaks and incentives in pre-tax dollars. NCEO estimates there to be somewhere over 6,500 ESOPs in America covering more than 14 million workers with the top 100 employing more than 631,000 people

Tara Jenkins founded Conscious Revolution in 2019 as a way to help CEOs and founders infuse purpose, conscious culture, and leadership into the way they do business. Along with another arm of her business called Beyond Racial Equity that focuses on building racial equity within organizations, Tara – along with Elise Allyn (hired in 2021) have a lot of experience guiding people through the ESOP process and were kind enough to sit down with me and demystify all it entails.

“There’s some really big companies in the United States that are employee-owned,” starts Tara, “Publix is the largest one. Most of the other big employers that have ESOPs are not really household names or companies people would know from a branding perspective. Lots of manufacturing, supermarkets, retail, engineering/construction – they tend to be in more of those industries.”  

Of the top ten ESOPs in the United States, four are supermarkets, while the rest are either in manufacturing, engineering, staffing, or environmental services. 

What are the benefits?

A study by Rutgers found that companies with an ESOP grow at a rate of 2.3% to 2.4% faster than the projected growth without, seeing higher numbers in productivity and an overall lower employee turnover rate. Another study at the School of Management and Labor Relations at Rutgers University followed 1,100 ESOP companies and 1,100 non-ESOP companies around for a decade, concluding that ESOP-companies had a 77.9% business survival rate as compared to 62.3% for their non-ESOP companies. 

One perk – along with myriad tax benefits – is a sense of camaraderie that can help carry the company and its owners to success. 

“One of the biggest benefits I saw was that there was a lot of motivation for employees – even at the lowest level – to want to do their job well,” starts Elise, “because they’re getting something back from it.” 

Elise spent some time at an ESOP before leaving to pursue a new opportunity, but still receives annual statements and a letter from the President reviewing the previous year’s performance of the company – a testament to the level of transparency she and other employees gain from owning shares. 

“There’s some real benefits about how people can become invested and create long term value and wealth creation,” continues Tara, “but there are some other things that have to be considered before an ESOP is set up.”

Are there downsides?

“There’s a lot of different perceptions of ESOPs,” continues Tara, “people think they have more say, more power, or more control over the way the organization is run. For some employees that’s very appealing, but that may not be the experience they have when they get into the company.” 

Tara goes on to say that this motivating factor can be diminished if the way the company is run doesn’t change with its ESOP status, especially when they don’t see their day-to-day change all that much. 

“Just because you are a shareholder in an ESOP does not mean it’s a democracy,” says Elise, “There is still a leadership structure, you’re not voting on everything as a company, and there’s probably still an independent trustee.”

For the most part, your employer’s finances don’t affect an average employee all that much. If a company suddenly bombs, then yes — you will see layoffs, but you’d be hard-pressed to find a McDonald’s worker stressed about McD’s place on the stock exchange. With an ESOP, your shares are directly affected by the company’s finances.  

“Say the company has a down year or two or three or five bad years, you will see that when your share price dips,” starts Tara. “And if you are getting close to retirement, that can be pretty stressful and your motivation is definitely going to take a little bit of a hit as well.”

Is an ESOP right for me?

Tara has seen companies where adopting an ESOP changed nothing in the employees’ life beyond a new account and has witnessed the other side of the spectrum, too where employees have sat as members of the board. 

Becoming an ESOP isn’t something that happens overnight. It takes a wealth of communication, transparency, and introspection to even go so far to know if an ESOP is right for your company as an employee or employer. 

“If someone founded a company on the principle of shared ownership, then [ESOPs] make sense to embed more of a shared ownership within the organization,” says Tara, “The most important tool for making business decisions is to know what your higher purpose is, because it makes the decision making so much more efficient for the entire leadership team.”

By Jeremy Glass, October 20, 2021