Promoting Success with Employee Stock Ownership Plans

In the last century, the federal government’s promotion of home ownership (primarily through mortgage interest deductions) has been a driving force to help stabilize communities, build middle class family wealth, and reduce poverty.

Some feel that in the coming decades the ownership to be promoted will be an employee’s ownership in his or her employer – through Employee Stock Ownership Plans (ESOPs).  Such ownership promotes capitalism, encourages long-term savings, keeps jobs in America, allows workers to share more in the fruits of their labors, and helps keep middle class Americans from falling into poverty – both before and after retirement.

According to Kent State University, “Studies continue to show that employee ownership is one means to successfully build jobs, create wealth, and strengthen communities.” (Ohio Employee Ownership Center, Summer 2012 issue of Owners @ Work)

According to the 2010 General Social Survey, as quoted in the magazine of the National Center for Employee Ownership (NCEO), “Less than 3% of people who say they own stock in their companies reported being laid off in the last 12 months, compared to 12% of those who do not own stock. In addition, while 24% of the non-owner employees intend to look for new jobs in the near future, only 13% of employee-owners do.”

As Michelle Obama said at the 2012 Democratic National Convention “When you've worked hard, and done well, and walked through that doorway of opportunity … you do not slam it shut behind you … you reach back, and you give other folks the same chances that helped you succeed.”  That is what retiring owners do by selling their companies to employees through ESOPs instead of selling to outsiders.

The concept of ownership has already become common in life insurance companies, where mutual life insurance companies are owned by the policyholders, not unrelated shareholders.  In these cases profits come back as dividends to the policyholders.  The same is true of the giant Vanguard mutual fund family, where the company is owned by the people investing in the funds and profits are applied to reduce the expenses for operating the funds.  The ESOP-owned company is similar in that the profits go back to the worker, in the form of contributions, dividends, and stock appreciation in a tax deferred account to be saved for retirement.

A survey by Messrs. Blasi and Kruse (of Rutgers University School of Labor and Management) of 1,100 ESOP companies over an 11-year period, which compared ESOP companies to comparable companies without ESOPs, found that the 1,100 ESOP companies had better sales, more employment, and were 16% more likely over that period to remain independent businesses.

Spencer Coates, President of Houchens Industries, the largest of Kentucky’s 100 ESOPs and one of Kentucky’s top success stories, tells of a secretary who retired from their firm after many years of participation in their ESOP.  The secretary had over $1,000,000 in the ESOP account at retirement!  It could all be converted to cash; and it could all be rolled over into an IRA for further deferral of taxes!

Business owners, pondering their options for converting a business into retirement income, should at least consider the tax advantages and potential favorable impact on employees of using an ESOP.