Why You Should Let Your Employees Own Your Company
WHY YOU SHOULD CARE
Because who wants to be a have-not?
By Corey Rosen
The author is the founder of the National Center for Employee Ownership, a nonprofit based in Oakland, CA.
The rich are getting richer, and the poor keep muddling through. It’s a constant campaign refrain, and while most folks admit that economic inequality is a problem, agreeing on ways to narrow that divide has proven nearly impossible. Higher minimum wages will help several million people, but it does little to address the fact that owners of capital reap more and more while those working for them get less and less.
Real wages have been stagnant since the 1970s, but returns on capital have been impressive. The Dow Jones industrial average, for example, had only three digits in the 1970s, compared to five today. So it’s high time to embrace an approach that has fans on both the left and the right: broadening employee ownership. Bernie Sanders has proposed legislation promoting it, the Center for American Progress calls it an essential tool for creating “inclusive capitalism” and the Republican Party’s new platform endorses it, as do all three of Britain’s largest political parties.
But helping today’s have-nots participate in capital growth could be far more pervasive if opinion makers … started taking the idea more seriously.
Whether through company-funded employee stock ownership plans (ESOPs) or widely granted stock options and the like, broad-based employee ownership plans are actually pretty common in the U.S. The framework can involve employees buying stock, but most U.S. programs allow workers to become owners even without having to cough up scarce dollars to do so. But helping today’s have-nots participate in capital growth could be far more pervasive if opinion makers — namely business and political leaders — started taking the idea more seriously.
Broad-based employee ownership plans now cover more than 20 million American employees, with ESOPs being the most common approach. These are set up and paid for by the company through a trust, with the plans being funded by the employer that cover all staffers who meet a basic service rule.
Congress has supported ESOPs by granting companies and their owners significant tax benefits. Owners of stock in a closely held C corporation (or an S corporation that converts to a C) who sell to an ESOP that ends up with 30 percent or more of the stock, for example, can defer capital gains taxes on the sale by reinvesting the proceeds in other U.S. stocks and bonds. The money the company uses to buy out the owner is tax-deductible, a benefit that does not apply to any other kind of stock redemption. Employees do not pay tax on ESOP contributions until they take the money out, and even then they can roll those amounts into an individual retirement account first before paying tax.
There are 9,000-plus ESOPs and similar plans in the U.S. covering more than 13 million people with more than $1 trillion in assets. Many of the plans are held by employees owning a majority of their company. While most of these companies are small to midsize, there are also some very large companies and many well-known names, such as Publix Super Markets and W.L. Gore & Associates, maker of Gore-Tex. And while there have been a few notable ESOP failures — namely Tribune Company and United Airlines — most ESOPs have been a big success.
ESOP companies grow about 2.5 percent faster each year than those without an ESOP, Rutgers researchers say, and data from Department of Labor filings show that ESOP participants have about 2.5 times the retirement plan assets of non-ESOP employees. From 1990-2010, ESOP returns grew by 9.1 percent, compared to 7.8 percent for 401(k) plans. Signing up can also be good for job stability: The General Social Survey reports that employee owners are between a third and a quarter less likely to be laid off, compared to colleagues who do not sign up for the plans.
Sure, ESOPs are not the only way to share ownership. Companies like Google, Tesla, Starbucks, Whole Foods and others grant stock options or similar rewards and/or significantly discounted stock purchase plans to all employees. Another several million employees own shares or rights to shares this way, and research shows that these companies also outperform their peers. But expanding ESOP accessibility could go a long way toward minding the inequality gap.
Expansion would not require significant new tax incentives, although a tweak or two couldn’t hurt. Making the ESOP capital gains deferral available to owners of S corporations would help, as would allowing all ESOP trusts to qualify for set-asides if most of the beneficiaries are in the target population, regardless of who owns the stock. But the biggest obstacle is awareness. Actively promoting employee ownership to business owners, politicos and opinion shapers could help make this common-sense, bipartisan idea much more common.
- Corey Rosen, OZY Author Contact Corey Rosen