An employee stock ownership plan, or ESOP, could be the key to unlocking a stronger workplace culture and improving your bottom line.
Employee ownership may sound like a novel idea, but it’s a concept that’s been around for decades. The legal groundwork for today’s ESOPs was first laid within the 1974 Employee Retirement Income Security Act (ERISA), and as of 2019 there are roughly 6,600 employee stock ownership plans covering more than 14 million participants in the U.S.
As employers look for new ways to differentiate their benefits programs in a tight labor market, ESOPs are gaining traction. Some of the nation’s top-performing companies are employee-owned, including Publix Super Markets, Amsted Industries, W.L. Gore and Associates , and Davey Tree Expert. In fact, organizations with ESOPs or other employee-ownership plans make up more than half of Fortune Magazine’s 100 Best Companies list year after year, according to esops.org.
ESOPs elevate the whole company
From their positive effects on personal finances to the corporate income tax relief they provide, ESOPs benefit both employers and employees for a variety of reasons.
- More secure retirement: Employee-owners feel better prepared for their retirement. Ninety-one percent of ESOP retirees say they have enough money to retire comfortably, compared to just 49% of non-ESOP retirees. Millennials, many still saddled with student debt, particularly benefit from ESOPs. Two-thirds of millennials working at employee-owned firms expect to retire by age 65 — twice the number of millennials at non employee-owned firms. And 56% of millennial employee-owners had at least six months’ salary saved for retirement, while 66% of non-ESOP millennials had no savings at all.
- Higher profits: Employee-owned firms have higher profits compared to their shareholder-owned counterparts — in good times and bad. Since the ESOP Association’s annual Economic Performance Survey began in 2000, ESOP respondents have seen profit increases every year except 2002 and 2010, which correlate to economic downturns. But even in those bad years, at least 29% of ESOP respondents reported profits and/or revenue increases, indicating a resilience in weathering tough times. Those profits spread to employees. Three-quarters of ESOP respondents increased wages at or above the national average of 2.7%, and 29% increased wages by 4% or more.
- Tax savings: ESOPs enjoy several significant tax benefits. Company owners who sell to ESOPs can defer some of their capital gains. Company cash and stock contributions are tax-deductible. Employees’ tax on contributions to the ESOP are deferred until retirement. Organizations with 100% S Corporation ESOPs pay no federal corporate income tax, an incentive introduced by Congress to encourage employee ownership. The additional cash flow created from tax relief helps support business innovation, growth, and investment.
- Culture of ownership: Most importantly, employee-owners help foster a unique culture of stewardship and accountability that differs from those at stakeholder-owned companies. It’s simple, really: Employees are more driven when the success of the company directly impacts their earnings. This culture of ownership likely contributes to the lower rates of layoffs and turnover at ESOP companies.
Employee Ownership in practice
Building a great company meant supporting the employees who made it all possible, which is why “employee owned” was a value West Monroe embraced back in 2002.
Yet, despite growth in size and revenue after our first 10 years, our Earnings and Appreciation Sharing Plan wasn’t delivering on its promise to sufficiently retain and reward our talent. At the same time, our founder’s retirement was swiftly approaching, and we’d likely need a capital infusion to buy out his portion of the Earnings and Appreciation Sharing Plan.
So, we set out to explore alternative ownership structures for the next phase of our growth. Ultimately, we decided to convert to a 100% S Corp Employee Stock Ownership Plan (S ESOP) that would better empower our employee-owners. This plan gives each of our employees market-based ownership in the firm based on their tenure and advancement in the company. Under the new structure, employees don’t need to purchase shares or invest their own money. As long as they’re employed at West Monroe, they’ll receive a share allocation every year.
Since the transition, we’ve experienced many of the benefits outlined above firsthand. The S ESOP provides additional cash flow, which we’ve used to successfully acquire five firms. We’ve continued to grow exponentially in size and revenue. But more importantly, our culture is stronger than ever. With wealth and retirement security, our employees are driven to take ownership and succeed together. At the end of the day, we want our employees to grow with us — and our employee stock ownership plan helps us do just that.
