Employee Stock Ownership — ESOPS

By Corey Rosen

If you’ve worn Gore-Tex lately or flown on United Airlines, you’ve patronized a company most of whose stock is owned widely by its workers, through employee stock ownership plans, or ESOPs. During the last decade, the number of ESOPs and their control of assets has boomed. ESOPs now exist in about 11,000 U.S. companies, and in about 2,500 of them employees are the majority shareholders. An ESOP is a kind of employee benefit plan. Shares are given at least to all full-time employees who have worked for a minimum of one year. Allocations are based on relative pay (but with a cap at $160,000 or, in one-third of the cases, a more equal formula such as seniority or a lower pay cap). When an employee leaves the company, he or she can sell the shares on the market (if there is one) or back to the firm at a price set by an outside appraiser (if there is no market).

Employees give up wages for their ESOP in about 2% of the cases, and other existing fringe benefits are changed around half the time. Contrary to popular impression, only about 1% of all ESOPs are set up to save a failing company. The vast majority of ESOPs are in “closely held” companies (those whose stock had previously been owned by one or a few people), rather than ones whose stock is publicly traded. And the percentage of stock owned by employees is typically much higher in private than public companies. But on average the public companies are larger, so half the total workers with ESOPs are in publicly traded firms. About 50% of the ESOPs in private firms are used to buy out an owner of a successful company; the rest are typically used by companies primarily as an employee benefit.

Worker Control and Company Performance

ESOPs are governed by a trustee appointed by the company’s board. In all publicly traded companies, employees must be able to direct the trustee on how to vote their shares, while in closely-held companies, it is up to the company to decide. Employees have been given full voting rights in only about 40% of those cases in which they own a majority of the stock. When workers own most of the stock and have full voting rights, they have the potential to elect their own board members, but often vote for whoever was already on the board. Non-management employees are represented on the company board in only 4% to 5% of ESOPs.

ESOP companies are much more likely to set up employee participation programs, such as self-managing teams, than are those without ESOPs, according to surveys in Michigan and Ohio. But probably a third of all ESOPs do little, if anything, to involve employees in work-level decisions.

In a 1987 study by the National Center for Employee Ownership, we found that participative ESOP firms grew 8% to 11% faster with their plans than they would have without them. Several subsequent studies have confirmed this relationship. Of course, there are risks for workers, since not all employee ownership plans succeed. About 0.8% of all ESOPs have gone bankrupt, for instance, harming workers’ retirement savings.

Corey Rosen is the Executive Director of the National Center for Employee Ownership in Oakland, California www.nceo.org. Reprinted with permission from the joint issue of Dollars & Sense and Geo, Sept./Oct. 1998.

You May Also Like