A new study by Jared Bernstein – who was recently named to President-elect Joe Biden’s White House Council of Economic Advisors – examines the benefits of employee stock ownership plans (ESOPs) and, given that there are still relatively few U.S. ESOPs, proposes ways to encourage the formation of more employee-owned businesses. The study, conducted with support from the Employee-Owned S Corporations of America (ESCA), uncovers obstacles to the creation of ESOPs and urges policy and private sector leaders to take steps and find new approaches to remove these barriers.
Bernstein, who is currently Senior Fellow at the Center on Budget and Policy Priorities, finds that “education and awareness about private ESOP structures, both for owners and their professional advisors, are the most frequent hurdles to ESOP creation,” and that other hurdles include what he calls “opportunity costs of owners” who may not want to invest the time and resources needed to set up an ESOP as they plan their exit strategies.
To overcome these barriers, Bernstein suggests private and governmental approaches to “help more retiring business owners access the resources and information they need to fully consider an ESOP for their company,” especially as those owners are considering retiring.
As part of his study, Bernstein interviewed entrepreneurs about why they decided to start ESOPs. Here’s what they had to say:
Bill Roark, Co-Founder & CEO, Torch Technologies: “People work hard. I’ve got a lot of people who would work to the wee hours of the night trying to make the company successful, and when the company succeeds, I don’t think it’s right for me to take all the proceeds and go home with them. …we wanted to treat our people as owners. People care about the success of the company because they have a stake in the outcome.”
Ken Baker, CEO, New Age Industries: “I wanted a high-performance company, and I knew that if I didn’t give ownership, I wouldn’t get high performance. I think there’s just a different mindset of an owner versus just an employee.”
Joey Nestegard, CFO, Schweitzer Engineering Laboratories: “[Owners] sell to an ESOP because they want their employees to run it and grow it, see their dream fulfilled, and have a stake in that outcome. …It’s a model completely designed for long-term employee engagement, long-term employment…you’re not chasing short-term anything…and our customers know we’re in it for the long haul.”
“Jared Bernstein’s new study provides a compelling case for the value to workers and the economy broadly of creating a national environment that gives rise to more employee stock ownership plans (ESOPs), as well as a thoughtful roadmap for how to get there,” said ESCA President and CEO Stephanie Silverman. She added, “As hardworking Americans grapple with staggering economic uncertainty driven by the pandemic, we hope more policymakers in Washington will support bipartisan proposals to encourage private companies to become ESOP-owned, giving more Americans the chance to have financial stability and giving more companies the opportunity to see productivity gains as well.”
In a previous study by Bernstein, also conducted with support from ESCA, he demonstrated that employee ownership helps to close the wage and wealth gap between managers and workers in ESOP-owned companies. “Employee ownership — and ESOPs in particular — should be part of our national discussion on ways to reduce inequality,” Bernstein said in releasing the 2016 analysis. “ESOP’s transfer capital ownership to wage earners, directly reducing our extremely high levels of wealth concentration, and ESOP firms appear to have less internal wage dispersion.”
Since Congress created the S corporation ESOP structure through bipartisan legislation over 20 years ago, more than 3,000 private U.S. companies have become S corporation ESOPs, enabling one million workers to have an ownership stake in the businesses where they work.
ESCA, Employee-Owned S Corporations of America, is the voice in Washington, DC that speaks exclusively for employee-owned S corporations (“S ESOPs”). Since 1998, ESCA’s membership has grown to represent more than 215,000 employee-owners in virtually every state in the nation. ESCA company members engage in a broad spectrum of business activities and are a variety of sizes – from 25-person businesses to companies with 18,000+ employee-owners – but all have one thing in common: a commitment to protecting the S corporation ESOP structure and promoting it so that more working Americans can become employee-owners.