Employees benefit, too—ESOPs give workers at all levels of a company the opportunity to build wealth and save for retirement. They pay no income tax on corporate contributions to their accounts until they receive a distribution, which comes when they either leave the company or retire. Taxes can be further deferred by rolling over the distribution into an individual retirement account (IRA) upon departure.
A Boost to Performance
Employees who have a stake in a company can be more motivated, have greater job satisfaction, and enjoy more job security than workers in a non-ESOP environment.
“Having this new structure has allowed for clearer, more prominent roles to emerge within the company,” confirms Salad Savoy’s Karm, “with a noticeable shift in attitudes and responsibilities to reflect the changing nature of ‘the employee’ to ‘individual owner.’ It’s hard to deny the appeal of a vested interest in the future growth and profitability of the company.
“We have all risen to the occasion,” Karm continues, “and with the groundwork put in place before John and Marsha assumed their new roles, we are in prime shape to continue the steady growth we’ve enjoyed over the last decade.”
Numerous studies illustrate that ESOP companies perform well, and often better than their peers, with Rutgers University, the U.S. Department of Labor, and the National Center for Employee Ownership (NCEO) citing the advantages.
A 2017 NCEO research report found that ESOP companies not only tended to grow faster than their non-ESOP counterparts, but provided greater job stability. Similarly, the Department of Labor (DOL) reported that between 2000 and 2014, ESOPs with 100 or more participants outperformed 401(k) programs, averaging a 5.1 percent aggregate rate of return versus 4.5 percent for non-ESOP businesses.
Research from the NCEO based on DOL filings showed companies with ESOPS contributed more to these programs, on average, than to 401(k) plans, and ESOP participants have approximately 2.2 times as much in their accounts as participants in comparable non-ESOP companies with defined contribution plans.
Lastly, among workers aged 28 to 34 sampled in the 2017 NCEO study, employee-owners have 92 percent higher median household wealth, 33 percent higher income from wages, and 53 percent longer median job tenure relative to workers who are not participants in ESOPs.
Possible Downsides
Employee stock ownership plans, for all their benefits, do have some disadvantages. A third party may be willing to pay more for a company than the fair market value required by ESOP regulations during a sale, and another downside is the dilution of current shareholder stock as new shares are issued.
