Last updated: Jan. 5, 2017
“It’s been really amazing to hear from our witnesses today that proved that you don’t have to choose between people and profits.”
–Congresswoman Janice Hahn, referring to the small business leaders who spoke at a House hearing on a bipartisan bill (HR 2096) that would create incentives for businesses to adopt employee stock ownership plans, or ESOPs.
Employee ownership and profit sharing, sometimes called “shared capitalism”, refer to any of several mechanisms by which individual employees share in the growth and financial success of the company as a whole. In terms of inequality, these mechanisms may be the best market-based solution for building long-term wealth among hourly wage workers. One such mechanism, Employee Stock Ownership Plans (ESOPs), is credited with turning 400 front-line workers at the WinCo grocery chain into millionaires.
For centuries, building wealth among low-wage workers has been a challenging and elusive goal for the workers themselves and for philanthropists, governments, and well-intentioned business owners. In a recent series of issue briefs on barriers to saving and the financial shocks that impact families’ financial well-being, the Pew Charitable Trusts made an important distinction that may explain the failure of most savings programs. Namely, most policies to date have sought to foster savings for long-term goals, such as for retirement and homeownership. The Pew data suggests instead that low-income earners’ needs tend to focus on saving for and covering expenses related to more immediate concerns such as car repairs, health care, or sudden loss of income. The implication is that after these expenditures, they have no additional cash to save.
Analysis by The Motley Fool, an investor financial solutions firm, supports this conclusion. Estimates based on the analysis suggest that almost 77% of American households are living paycheck-to-paycheck and are unable to save. Thus, despite the creation of 401(k)s, IRAs, and other similar retirement vehicles, a majority of households lack the ability to invest in them.
An ESOP, on the other hand, is a mechanism that creates an ownership stake for the employee without requiring the employee to invest any of his or her income. The Employee Retirement Income Security Act of 1974 (ERISA) was established to provide incentives for companies to create ESOPs and other similar ownership mechanisms. Today, almost 12% of the active labor force in the US participates in an ESOP. According to the National Center for Employee Ownership, ESOP participants have three times more in retirement assets than their counterparts in comparable companies that do not have an ESOP, and they earn 5-11% more in annual base pay. In addition, employee-owned companies are less likely to lay off employees in a recession and are more likely to survive the recession than more traditionally-owned companies.
One of the initial concerns regarding employee stock ownership is that employees can end up with a retirement portfolio that is too dependent on the performance of a single stock. While steps have been taken to reduce this risk – for example, most companies with ESOPs today also offer a more diversified 401(k) – continued education and encouragement of those employees who are able to contribute to a separate retirement account is still needed. Those employees who are unable to invest any part of their income, or only a very small part, may remain at risk should something happen to the company and the stock lose value.
Mechanisms for Promoting Employee Ownership and Profit Sharing
Employee Stock Ownership Plans (ESOPs) are the most common of several mechanisms that give employees a stake in the performance of the company they work for. Other types of ownership sharing include stock bonus plans and profit sharing plans, stock purchase plans (ESPPs), and stock option plans.
Employee Stock Ownership Plans (ESOPs)
Under an ESOP, which is governed by ERISA, employers are able to receive full cash value for their company by selling some or all of the shares to the ESOP, which then distributes shares over time according to a pre-determined formula to employees’ ESOP accounts at no cost to the employee. The employee can cash out the full value of the shares when he or she leaves the company or retires. ESOP companies tend to outperform and out last non-ESOP companies in their industry, and they also tend to retain their employees longer. As John Case wrote in The Atlantic, with no risk and a big upside for the employee and so many benefits for the employer, “an ESOP’s effects are sort of magical.”
The National Center for Employee Ownership (NCEO) estimates that there were almost 6800 ESOPs with approximately 13.9 million participants as of 2013. Most ESOPs are in privately held companies; only 8% are public.
Stock Bonus Plans and Profit Sharing Plans
Like ESOPs, certain stock bonus plans and profit sharing plans are governed by ERISA and provide tax deductions to companies as an incentive for them to make contributions to an employee-owned trust. As with an ESOP, employees receive these contributions at no cost, meaning that they are able to build their savings regardless of their income level and daily expenses. For these reasons, NCEO refers to these plans as “ESOP-like” although neither of the plans includes all the benefits of an ESOP. In fact, according to the NCEO, stock bonus plans are less common than they once were as many have been replaced by ESOPs because of the better tax benefits. Profit sharing plans have continued to thrive, however.
The NCEO estimates that as of 2013 there were slightly more than 2500 ESOP-like plans with 1.18 million participants. Most of these were profit sharing plans in which at least 20% of assets were invested in company stock.
Stock Option Plans
Stock option plans give employees the right to purchase stock at a price set at the time the options are granted. Typically, there is a vesting period before the employee can cash out by exercising the options (i.e. purchasing the stock) and selling the stock for a profit at the market rate. Like an ESOP, there is little risk to the employee when the options are granted, but unlike an ESOP, the employee does not keep the full market value of the stock.
Employee Stock Purchase Plans (ESPPs)
ESPPs, which are sometimes called “423 plans” in reference to the section of IRS tax code that governs them, allow employees to purchase company stock at a discount, usually around 15% but sometimes the discount is only as little as 5%. Unlike ESOPs and ESOP-like profit sharing, ESPPs must include all full-time employees who have been with the company at least two years, but only those employees who can afford to make the investment are able to participate.
The NCEO estimates that there are 4000 ESPPs with 11 million participants.
There are many ways that we as individuals can substantively influence implementation of some kind of employee ownership or profit sharing plan and contribute to reducing income inequality. Below we list a few ideas along with resources that can help you become a more informed and engaged shareholder, business person, voter – and maybe even an American leader. Our list is not comprehensive, so if you have other ideas or know of another resource that belongs here, please let us know.
Track and support proposed legislation
A bill that would create incentives for companies to establish employee stock ownership plans passed in the House on September 22, 2016 and was sent to the Senate for consideration but was never passed into law. Click the link in the table below to visit the GovTrack page on this bill. You’ll be able to learn more about it and contact your congressmen to inquire what plans they have for this year.
Another bill, HR 2096, is also included in the table. It was introduced more than a year before HR 5719, and never moved out of committee.
We will update this page as new proposals are made in the current session of Congress.
|Efforts to promote employee ownership and profit sharing
S. = “Senate Bill” | H.R. = “House of Representatives Bill”
|H.R. 5719: Empowering Employees through Stock Ownership Act
|Passed in the House on 9.22.2016 and went to the Senate (see companion bill S. 3152);
GovTrack gave it a 47% chance of being enacted
|Rep. Erik Paulsen||Creates incentives for companies to establish employee stock ownership plans.
|H.R. 2096: Promotion and Expansion of Private Employee Ownership Act of 2015
|Referred to committee;
GovTrack gave it a 2% chance of being enacted
|Rep. David Reichert||Expands the availability of employee stock ownership plans in S corporations|
Set up an ESOP at your own company
The National Center for Employee Ownership offers a six-step guide to setting up an ESOP. While NCEO is an enthusiastic advocate for ESOPs, it recognizes that they are not for everyone and offers the reminder that as you investigate whether it is right for you, you can stop your pursuit at any time if the pieces don’t seem to fall into place.
Learn more about employee ownership
Visit the National Center for Employee Ownership website to review loads of data and access recent studies about ESOPs and other employee ownership options. You can also become a member of NCEO for access to free webinars on ESOPs and equity compensation and discounts on publications, seminars, and NCEO’s annual meeting.
Buchele, Robert, and Douglas Kruse, Loren Rodgers, Adria Scharf, “Show Me the Money: Does Shared Capitalism Share the Wealth?”, NBER Working Paper Series #14830, National Bureau of Economic Research, http://www.nber.org/papers/w14830. Accessed September 27, 2016.
Jagoda, Naomi, “Lawmakers, small businesses praise employee stock ownership plans”, The Hill, April 27, 2016, http://thehill.com/policy/finance/277875-lawmakers-small-businesses-praise-employee-stock-ownership-plans. Accessed September 8, 2016.
Rosen, Corey, “The State of Broad-Based Employee Ownership Plans 2016”, National Center for Employee Ownership, August 2016. Downloaded September 29, 2016.
Stoffel, Brian, “The Average American Was Able to Save This Much Money Last Year. It Isn’t Pretty. How Do You Compare?”, The Motley Fool, October 25, 2015, http://www.fool.com/retirement/general/2015/10/25/the-average-american-was-able-to-save-this-much-mo.aspx. Accessed September 28, 2016.
Case, John, “The Life-Changing Magic of Turning Employees Into Shareholders”, The Atlantic, September 8, 2016, http://www.theatlantic.com/business/archive/2016/09/life-changing-magic-of-turning-employees-into-shareholders/498485/. Accessed September 12, 2016.
Josephs, Mary, “Millionaire Grocery Clerks: The Amazing WinCo Foods Story”, LinkedIn, November 6, 2014, https://www.linkedin.com/pulse/20141106203753-60905939-millionaire-grocery-clerks-the-amazing-winco-foods-story?forceNoSplash=true. Accessed September 8, 2016.
“A Brief Overview of Employee Ownership in the US”, National Center for Employee Ownership, https://www.nceo.org/articles/employee-ownership-esop-united-states. Accessed Sep 28, 2016.
National Center for Employee Ownership, http://www.nceo.org, Accessed multiple pages, September 2016.
H.R. 5719: Empowering Employees through Stock Ownership Act, GovTrack.us, https://www.govtrack.us/congress/bills/114/hr5719. Accessed September 30, 2016.
H.R. 2096: Promotion and Expansion of Private Employee Ownership Act of 2015, GovTrack.us, https://www.govtrack.us/congress/bills/114/hr2096. Accessed September 30, 2016.