Benefits of Employee Stock Ownership Companies

By Chad Bell, ASA

Employee ownership of a company can offer many benefits to both employees and owners. An employee stock ownership plan (ESOP) is a defined contribution plan that invests primarily in employer stock, which incentivizes employees to remain at the company and increase its value long-term.

To form an ESOP, shareholders sell their stock to an employee stock ownership trust, and the employees or beneficiaries of the ESOP receive contributions for the purposes of retirement. ESOPs provide attractive benefits to virtually all stakeholders in a company, including the employees, selling shareholders, the business itself and, by extension, vendors and even the public.

The most notable benefits of ESOPs are the tax benefits and the unique and attractive succession, estate planning and liquidity opportunities these plans provide while still allowing business owners to maintain both a key role in leading their companies and preserve the careers of valued employees. Less frequently identified and discussed are the more intangible benefits, including reduced turnover, greater employee engagement and productivity, and the indirect economic benefits that may be created from employees being allocated company stock at no cost to the company.

Performance during COVID-19 pandemic

A 2022 study conducted by the National Center for Employee Ownership (NCEO)1 found benefits of employee ownership for both companies and employees during the COVID-19 pandemic. The study examined a sample of ESOP and comparable non-ESOP companies in the food industry and found that “ESOP companies fared better in terms of workforce retention, benefits and retirement security, and firm performance in 2020. ESOP food companies had lower median involuntary separation rates (2% vs. 5%), were more likely to offer employer-paid health care (89% vs. 71%) and were more likely to have seen revenue increases from 2019 to 2020 (53% vs. 35%).”

The NCEO and the Employee-Owned S Corporation of America (ESCA) also found in 20212 that “workers at S-corporation ESOP companies had more in retirement savings and received more retirement contributions from their employers both before and during COVID-19.” Such companies contributed 2.6 times more to retirements compared to companies offering only 401(k) plans. Even controlling for the size, industry and region of the companies examined, the average retirement plan balance for an ESOP participant was $67,000 higher than the comparison group studied. The same study found “evidence that ESOP companies retained and created more jobs during 2020, also controlling for size, industry and region.”

Employee retention was also found to be greater among employee-owned companies in a 20203 study by the Rutgers School of Management and Labor Relations and the Employee Ownership Foundation. Employee retention was not the only benefit, however. This study also found that ESOP companies had improved workplace health safety during the pandemic and that they were also “less likely to make pay cuts (26.9% vs 57.3%) and more likely to take proactive steps to prevent the spread of COVID-19 (98.3% vs 88.9%).”

A meta-analysis of empirical studies on employee ownership published in 2013 found that firms with ESOPs outperform non-ESOP firms. This effect was small but positive and statistically significant. In addition, there was a robust relationship between ESOP participation and firm profitability.4

These results indicate that ESOP companies offered significant protective effects for their employees during the pandemic, including employee retention and improved performance on the employer side and improved retirement balances, workplace safety and pay protection for employees.

Reduced employee turnover

Providing employees with company ownership provides an inherent incentive to remain at the company and increase company performance.5 This singular benefit has been shown to lead to greater and clearer motivation to maximize company performance and profitability since doing so benefits each employee-owner. Additionally, by aligning the incentives of staff and management, a shared interest in success is created, which is considered by many to be a pathway to reducing conflict between executives and employees by encouraging cooperation toward achieving a common goal.

Numerous studies have found that a more committed and engaged workforce has resulted in ESOP companies having lower overall employee turnover. In December 2018, NCEO reported that the voluntary and involuntary average separation rates for ESOP employees over a four-year period were more than two times lower as compared to the national average.6

The 2020 Rutgers and Employee Ownership Foundation study discussed above also found that employee-owned companies were “three to four times more likely to retain staff.” A previous study in 2017 found that employment stability conferred additional benefits during economic downturns. Publicly traded firms with employee ownership had greater employment stability — a finding that held for both negative shocks in the overall economy or shocks that were firm-specific. Such firms were also more likely to survive the two previous recessions.7

These studies, which have examined ESOPs and employee ownership from a variety of angles and contexts, consistently indicate widespread positive effects for employment stability and reduction of employee turnover. In today’s climate of unprecedented tightness in the labor market, such positive findings indicate that employee ownership can offer one path to securing the firm’s stability and survival long-term.

Improved company performance

With the focus on business performance heightened for ESOP employee-owners, it is not surprising that academic and practitioner research has identified a statistically significant correlation between employee ownership and company performance. These studies of employee-owned companies have found that ESOP companies outperform non-ESOP companies and that performance and profitability were found to be positively impacted by ESOP participation levels and time, potentially related to the implementation of more effective ownership cultures.8 The increased profitability has been attributed to the fact that although not every employee can boost sales or affect a customer’s experience, each can have a role in improving processes and minimizing waste.

The 2019 ESOP Economic Performance Report9 found that, for the fourth year in a row, responding ESOP companies reported that profits rose at rates greater than revenue. The ESOP Association speculated that these companies were succeeding at minimizing costs and that employee-owners may have assisted in these efforts. The survey also revealed that 75% of ESOP employees were involved in keeping down costs and helping companies improve profit margins to share in benefits.

Studies have also found that productivity improves by more than 4% to 5% in the year the ESOP is set up, and this higher productivity level is maintained in subsequent years.10 The data on company performance related to employee ownership is clear and consistent — far from simply conferring benefits to employees, firms stand to benefit from the formation of an ESOP.

Higher retirement savings

Many employees at all compensation levels do not save enough for a comfortable retirement. Decades of research has shown that ESOP companies are more likely to offer secondary retirement plans than non-ESOP companies are to offer a single plan; ESOP participants have considerably more retirement savings; ESOPs overall not only have higher rates of return than 401(k) plans, but are also less volatile; and ESOPs cover a greater number of, and are better designed for, lower income and younger employees than 401(k) plans. In December 2018, the NCEO reported that ESOP participants surveyed had more than twice the average amounts in retirement accounts than the national average: approximately $170,000 compared to the $80,000 average retirement savings of employees of non-ESOP companies.

Secondary impact of increased savings

The most recent research and studies have revealed that the greater retirement savings of employees of ESOP-owned companies can help reduce wealth inequality. Researchers discovered that ESOPs enable families to significantly increase their assets, reducing gender and racial wealth gaps, suggesting that employee ownership can reduce wealth inequality. Additionally, the greater retirement savings that are evident in ESOP-owned companies, coupled with the fact that the participants are not required to pay for this benefit or make participant contributions, reduces asset insecurity and can provide retirement assets for those who may otherwise be unable to afford to contribute toward a retirement plan.11 While employees are generally required to sign up and elect to defer income with a 401(k) plan, in an ESOP the company is required to allocate contributions to the ESOP. A nonESOP company may or may not make contributions or 401(k) matches based on the amount of an individual employee’s contributions. In fact, only approximately 58% of companies match employees’ 401(k) contributions.12

Conclusion

ESOPs operate under the concept that if increased company performance and profitability directly benefit ESOP participants through greater share value, employee-owners will have greater incentive to increase productivity and profits. An ESOP can significantly benefit both employees and management and provide an ideal solution for company performance under certain circumstances. The process of implementing an ESOP requires a team of experienced professionals to help business owners understand these steps and navigate the process of selling their business to an ESOP and achieving benefits related to firm performance as well as employee stability and retirement savings.

Jeffrey A. Davis, CPA (1954–2023)

Jeffrey A. Davis, CPA, passed away on Monday, Jan. 30, at age 68. Davis graduated from New Lisbon High School in 1972 and the University of Wisconsin–Whitewater in 1976. After graduation, he moved to Eau Claire to work with National Presto Industries. In 1980, Davis moved to Portage and joined an accounting partnership with Bob Goodman at Goodman & Davis CPAs. When Goodman retired, Davis entered into an accounting partnership with David Page at Davis & Page LLP, where he stayed until his retirement in fall 2021. Davis served as treasurer for the Portage Little League youth baseball for over 30 years and was one of the founding members of the Portage Area Community Fund, for which he served as treasurer. He is survived by his wife of 47 years, Marilyn; one son; two daughters; five grandchildren; four siblings; and many other relatives and friends.

Willis Krause, CPA (1938–2022)

Willis Krause, CPA, passed away on Thursday, June 30, 2022, at age 83. Krause was born and raised in Berlin, graduated from Berlin High School in 1956 and then moved on to UW–Madison to study accounting. He passed the CPA Exam after graduating and began working for the accounting firm Touche Ross & Co. (now Deloitte). He was licensed as a CPA in 1965. After Touche Ross, Krause joined The Milwaukee Company, an investment firm. In the early 1980s, he was hired as vice president of finance for Midway Hospitality Corp., where he remained until retiring at the age of 75. Krause is survived by three sons, two daughters, 15 grandchildren and five great-grandchildren. His wife, Helen, and two sisters preceded him in death.

James A. Mader, CPA (1946–2022)

James A. Mader, CPA, of Greendale, passed away on Saturday, Dec. 24, 2022, at the age of 76. He became licensed as a CPA in 1980 and became a member of both the Wisconsin and the American Institutes of CPAs. During his career, he served as a field auditor for the Internal Revenue Service, and he retired from the Wisconsin Natural Gas Co. Mader is survived by his beloved wife, Maria; three daughters; two stepsons; five step-grandchildren; a sister and a brother; as well as nieces, nephews and many other relatives and friends.

James B. Schommer, CPA (1932–2023)

James B. Schommer, CPA, passed away Sunday, March 5, at age 90. A 59-year lifetime member of the WICPA, Schommer’s involvement included service on the WICPA board of directors (1981–1982), the Federal Taxation Committee (1996–1997) and the Tax Conference Planning Committee (1999–2001). Schommer attended UW–Madison and ultimately became licensed as a CPA in 1963. WICPA records show that his past employers include Bremser Group Inc. in Waunakee (acquired by Honkamp Krueger & Co. in 2013) and Grant Thornton LLP. Schommer is survived by his wife of 58 years, Shirley; two brothers and two sisters; two sons and two daughters; eight grandchildren; and two great-grandchildren.

Carol Valley, CPA (1951–2023)

Carol Ann Valley, CPA, age 72, passed away on Friday, Feb. 10. She attended Waukesha South High School, graduating in 1969. She then attended UW–Whitewater, where she also worked for the university’s Accounting Department. She graduated with a Bachelor of Business Administration degree in 1972 and was hired as a staff accountant by Ronald Mattox & Associates in Madison. After the firm merged in 1975 with Alexander Grant & Co. (now Grant Thornton LLP), Valley continued her employment in the Grant Thornton Services Department. Later, she was hired by a private book store supplier as their first comptroller. In 1990, she began her own accounting firm in Columbus: Carol A. Valley CPA SC. Valley was a member of both the AICPA and the WICPA, as well as Rotary International, the Deforest Area Rotary Club, the Columbus/Fall River Rotary Club, the Columbus Downtown Development Corp. and the Columbus Chamber of Commerce. As a member of the Columbus/Fall River Rotary Club, she received the Paul Harris Fellowship award. Valley is survived by her husband, Richard; one son; one granddaughter; two sisters; and nieces, nephews, and many other relatives and friends.

Dan Walker, CPA (1964–2023)

Dan Walker, CPA, an audit partner in Wipfli LLP’s nonprofit and government practice, passed away unexpectedly on Tuesday, March 21. He was an active member of the WICPA, serving on the School District Audit Conference Planning Committee from 1998 to 2001 and again from 2007 to 2008. Walker also belonged to the AICPA, the Wisconsin Government Finance Officers Association, the Wisconsin Counties Association and the Eau Claire Jaycees. He graduated from Eau Claire Memorial High School in 1982 and attended UW–Eau Claire, graduating with a bachelor’s degree in accounting in 1986. Walker received his CPA license in 1988 and was employed by Wipfli for 37 years. He had planned to retire on May 31. Walker is survived by his wife, Babette; two daughters; a grandson; one brother and two sisters; and many other relatives and friends.

If you are aware of a member obituary and believe it should be included in Memorials, please send a copy of the obituary or contact Marcia Tillett-Zinzow at mtzinzow@icloud.com.