Toward Shared Prosperity: The Promise of Employee Stock Ownership Plans

June 8, 2023 • Maxwell Johnson

Over the past half century, income stagnation and a drop in the number of good jobs have decreased the share of income enjoyed by people in the lower and middle income brackets. In contrast, the share of total income accruing to the wealthiest Americans has shot up more than 60%. Women and people of color are particularly affected. Black Americans, for instance, make up 12% of the US population but hold less than 3% of national wealth—a figure that has remained virtually unchanged since the 1960s. The median Hispanic family, to take another example, has about one-fifth the wealth of the median white family. Unsurprisingly, most Americans, no matter their place on the income spectrum, believe inequality is one of the most important challenges facing the United States. A recent Pew survey is illustrative, finding that few Black adults think the current economic system treats Black Americans fairly—and many believe a change is needed.

Employee stock ownership plans (ESOPs) offer one tool to help build a more equitable economy. With 14 million participants, ESOPs are the most common form of employee ownership in the US, providing a means to build generational wealth. Yet, despite ESOPs’ benefits, their growth has dropped off in recent years. This poses a timely challenge as, today, millions of older business owners are approaching retirement and seeking options to pass their companies on to the next generation, a transfer of wealth valued at an estimated $10 trillion.

In this context, the Aspen Institute Economic Opportunities Program convened a discussion on April 11, 2023, titled “ESOPs, Job Quality, and Wealth Inequality: The Potential of Employee Stock Ownership Plans.” Talmon Smith, economics reporter for the New York Times, served as moderator. During the event—the second in a three-part series on employee ownership—we heard from a panel of experts, including Corey Rosen of the National Center for Employee Ownership (NCEO), Noelle Montano of Employee Owned S Corporations of America (ESCA), Sean-Tamba Matthew of SES ESOP Strategies, and Cindy Turcot of Gardener’s Supply and the Employee Ownership Foundation. Panelists discussed the promise of ESOPs for improving jobs and addressing wealth inequality, as well as opportunities to advance policies that encourage the growth of ESOPs.

ESOPs and Job Quality

An ESOP, federally regulated under the Employee Retirement Income Security Act of 1974, is a trust fund that owns all or part of a company and grants employees shares. Crucially, employees do not directly purchase company shares when an owner sells to an ESOP. Rather, as Rosen explained in his introduction, “The company funds this trust [and] uses tax-deductible money to do it.” Then, “the trust buys shares from the sellers.” These shares, in turn, “get allocated to everybody who works there on an equitable basis.” Employees may sell their allocated shares upon exit from the company.

Turcot saw the ESOP transition process play out up close over the course of her career at Gardener’s Supply, where she is now president and CEO. Shortly after Turcot started, in the 1980s, the company’s founder initiated the process that would lead to the Vermont company becoming owned in full by its employees, who, at the time, numbered 30. She recounted the founder’s belief in employee ownership. He knew that “we’d be more productive, we’d be more invested, we’d be more interested in what we were doing.” As the size of the company’s ESOP grew, so, too, did the size of its staff. The company reached 100% employee ownership in 2009, and, today, it boasts 250 employees.

The growth experienced by Gardener’s Supply during its employee ownership journey isn’t unusual. Research has shown companies with ESOPs often have greater employee satisfaction, less turnover and better resilience than those without. And, as Montaño of ESCA emphasized, the size of a company doesn’t determine its culture. To illustrate the point, Montaño told the story of a small company that was bought by a larger one that was a member of ESCA. “I used to work for a family-owned business, and I never felt like family,” an employee from the acquired firm said to her. Now, at the ESOP-owned business, the employee-owner “feel[s] like family.”

Many people observe that ESOP companies often have a different feel to them. Part of that can be the tight-knit feeling of a family as Noelle mentioned, but it can also relate to other aspects of company culture. Turcot discussed the participatory management culture she sees everyday at Gardener’s Supply. There, she observed, new employees enter “a very different work environment in terms of how we run our business and how involved [workers] are.” It’s a culture, Turcot noted, that is intentional in its transparency and in how it involves and communicates with staff. Gardener’s uses open-book management, where the company’s finances are regularly shared with the workers. They “immediately see the difference” in “how they’re treated and how they’re oriented.” And while not all ESOPs give employees the agency to help shape their work and engage them in generating ideas to improve company performance, Rosen has found that ESOP-owned businesses “are much more likely to do it than other companies.”

This culture is often paired with better job quality standards and practices. A 2016 study, undertaken by Jared Bernstein, now the acting chair of the White House Council of Economic Advisors, backs panelists’ observations of ESOPs’ positive effects on job quality. He found that employee-owned companies are likely to offer better pay and benefits and that employee-owners are more likely than other workers to have a diversified retirement plan—on top of the wealth they build via the ESOP. Employee-owned companies also appear to have more equal wage distributions than other firms. “These companies are in it for the long haul,” remarked Montaño, “they’re looking out for their workers in terms of the wages they provide [and] the benefits they provide.” This is particularly evident during economic downturns. During the COVID-19 pandemic, for example, ESOPs offered greater stability and security than their peers, she said. “We’re going to release a new study that NCEO has been working on for us that shows the quit rates and the layoff rates are much lower.”

ESOPs and Equity

In addition to the impact on workers’ job quality, another key theme during the conversation was the role of ESOPs in combating wealth and income inequality and improving race and gender equity. As retiring owners—including those of color—exit their businesses in the coming years, ESOPs may offer a historic opportunity to make meaningful progress on building wealth for those who have for too long been left behind.

Matthew laid out how ESOP transitions can preserve the wealth of minority business owners and increase that of employees. Transitioning minority-owned businesses to ESOP ownership is beneficial. But, as Matthew pointed out, firms that finance the creation of ESOPs should also seek out companies that have a significant number of employees of color. Apis & Heritage Capital Partners is at the forefront in doing so. The firm has raised $58 million for an ESOP buyout fund intended to convert businesses with significant minority workforces to ESOPs. “They’ve had two investments so far,” Matthew explained. An El Paso landscaping contractor and a Denver plumbing company—both with majority-Hispanic workforces—became 100% employee-owned.

Thanks to Apis and Heritage financing, “the contractor in Texas has increased the number of employees since the business transition.” What’s more, both businesses became minority-owned – via their employees—for the first time. This is doubly important, because, in addition to share ownership, employee-owners of color “have 30% higher wages than non-employee-owners.” The two companies supported by Apis and Heritage stand as an example to the country of how ESOPs “can help build wealth in their communities for people of color,” concluded Matthew.

ESOPs Have Bipartisan Support.

Panelists also discussed the unique bipartisan support that ESOPs and employee ownership hold. An analysis by the Institute for the Study of Employee Ownership and Profit Sharing at Rutgers University supports this, finding that over 70% of Republicans and Democrats would prefer to work for an employee-owned company.

The panelists remarked that congressional action on ESOPs has thus far been hearteningly bipartisan. Rosen noted early in the discussion that none of the 17 federal bills supporting ESOPs encountered opposition. Education and advocacy have been crucial in building political consensus for ESOPs, according to Montaño. “We’re the eyes and ears and voice on Capitol Hill,” Noelle said of ESCA, and “it’s just really exciting and meaningful” to talk to members of Congress about the positive effects of pro-ESOP legislation. Turcot pointed to the Worker Ownership, Readiness, and Knowledge (WORK) Act as one recent success. The WORK Act, passed as part of the omnibus spending bill in December 2022, provides $50 million for the Department of Labor to work with the states to increase awareness of employee ownership. This is a “huge opportunity,” Trucot emphasized, because a lack of awareness is one of the biggest obstacles to growing ESOPs and employee ownership. “We need more people to be talking about it, and we need boots on the ground [to work] through the challenges of thinking about an ESOP,” she explained.

What’s Next?

There is strong momentum in the private and public sectors for greater employee ownership, and panelists concluded the conversation with an overview of what is to come. Impact investment firms’ interest in ESOPs is growing, with more funds “coming online,” as Matthew put it. The firms’ work is demonstrating that “employee ownership transitions are essentially an investment class that institutional and other investors should look to invest in to get competitive.”

Paired with private sector progress is a push to build a more favorable policy environment for ESOPs. In addition to the WORK Act, which will help address the challenge of awareness, financing is also a major obstacle to ESOP transitions, according to Rosen. Currently, banks will not provide loans covering the entire transition cost, dissuading owners from selling as a result. In response, there is a movement underway to advance legislation to facilitate a loan guarantee vehicle for employee ownership transitions. This would encourage private banks to increase the size of their loans, closing the ESOP financing gap.

With a supportive policy environment in place, employee ownership could grow significantly over the decade to come. “I think it’s reasonable,” Rosen predicted, “that you could double the number of employee-owners” in ESOPs to nearly 30 million Americans. That said, he cautioned that we shouldn’t expect ESOPs to be a cure-all for societal ills writ large. But in an economy too often defined by the number of those left adrift, ESOPs enable real progress toward a fairer social contract, one in which workers can have a meaningful voice in their workplace and share in the nation’s prosperity.

Tweet .@AspenJobQuality hosted a discussion on employee stock ownership plans as a means to build a more equitable society. Read insights from special guests @sean_tamba, @EmployeesOwn, @theNCEO, @GardenersSupply.

Tweet Speaking at the @AspenInstitute, panelists discussed the promise of #employeeownership for improving jobs and addressing wealth inequality. Learn more in this blog post by @AspenJobQuality’s Maxwell Johnson.

Tweet With 14 million participants, ESOPs are the most common form of #employeeownership in the US, providing a means to build generational wealth and create a more equitable economy.

Employee Ownership Ideas Forum

The Aspen Institute Economic Opportunities Program will continue to support a robust national conversation on employee ownership. Please join us on June 14 and 15, 2023, for the Employee Ownership Ideas Forum, a two-day event, co-hosted with the Institute for the Study of Employee Ownership and Profit Sharing at Rutgers University, in Washington DC. Find out more and sign up for in-person or virtual attendance.