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Employee Stock Ownership: Increase wealth, morale and culture


Employers 11.16.2021 3 MIN

The paradigm shift in Corporate America toward stakeholder capitalism has opened the door for new benefit and compensation practices. Innovative companies are implementing employee ownership programs to strengthen their culture and create a more engaged workforce.

Offering employees the opportunity to own a stake in the company they work for, whether through an Employee Stock Ownership Plan (ESOP) or other employee ownership program, can potentially give all employees the opportunity to build wealth.

In the case of an ESOP (under the Employee Retirement Income Security Act), the employer essentially establishes a trust to hold equity shares in the company for its employees. Generally, employees aren’t required to put money into ESOPs, yet they may amass wealth through their ownership. Employees can also avoid taking on high-interest debt by borrowing against ESOP accounts when necessary.

The number of ESOPs in the U.S. exceeds 6,000. More than 14 million employees hold assets totaling over $1.4 trillion.1

 

How an employee ownership program improves business metrics

Employee ownership programs can also be a smart business initiative through their potential to significantly impact a company’s bottom line. Digging deeper, you’ll find that the motivation for employees receiving hourly compensation can be at direct odds with the aims of their employer. Workers want more hours, yet businesses want better productivity.

Without a personal incentive to deliver efficient work and a lack of support from employers, attrition can increase and company culture suffers. Employee ownership programs can address this dissonance by giving employees a stake in the success of the company. Besides improving morale, these programs can impact employees’ views of leadership for the better, enabling a paradigm shift that improves work product, culture and more.

 

Employee ownership programs can narrow the income gap

The top 20% of employed individuals received more than half of all income earned in the U.S. in 2019 (see table “Income Disparity”). By contrast, the bottom 20% of employed individuals accounted for just 3.1%. At a macro level, employee stock ownership can be a creative way to help narrow wealth disparities and address the problem of income inequality in the U.S. By offering employees a stake in the business and the long-term wealth generation opportunities that come with it, employee ownership programs can also help lower-income and wage workers build a path to a stronger retirement that they might otherwise not attain.

 

Income Disparity2

     (2019 data)

Income category

% of all U.S. income earned

Average household income

Top 5%

23.0%

$451,122

Top 20%

51.9%

$254,449

Bottom 20%

3.1%

$15,286

 

If every business in the U.S. implemented employee ownership at 30%, the share of wealth held by the lower 50% of Americans would be projected to spike from 1.4% to an 6.4% of Americans’ total net worth.3

 

Rolling out an Employee Stock Ownership Plan (ESOP)

One of the most common mistakes companies make while planning employee ownership programs, is in their communication strategy. By failing to educate employees from the beginning on what it means to be an owner and the associated personal financial implications, companies run the risk of undoing the culture-building that’s achieved by making company ownership more equitable and widespread. The lack of education can also hinder employees from taking full advantage of the opportunities offered by the ESOP.

 

Put our experience and resources to work for you.

Thinking of launching an employee stock ownership program at your organization? Goldman Sachs Ayco Personal Financial Management can serve as an extension of your human resource and benefits teams to understand employees’ needs, educate employees about your benefit offerings and help ensure their personal finances are clear, understood and in their control.

Learn more about how we can help you create a more productive, financially well and engaged workforce at all levels.

1https://www.aspeninstitute.org/wp-content/uploads/2021/03/Race-and-Gender-Wealth-Equity-and-the-Role-of-Employee-Share-Ownership.pdf citing “Employee Ownership by the Numbers,” National Center for Employee Ownership, September 2020, https://www.nceo.org/articles/employee-ownership-by-the-numb

2Source: https://www.thebalance.com/income-inequality-in-america-3306190 citing National Center for Employee Ownership, September 2020, “Employee Ownership by the Numbers,” https://www.nceo.org/articles/employee-ownership-by-the-numbers.

3Source: Article on the Menke Group website citing study findings in the May 2021 article “The Big Benefits of Employee Ownership” published in the Harvard Business Review