How Employee Ownership Strengthens Business Resilience in Economic Uncertainty

An employee stock ownership plan, or ESOP, provides benefits that endure through economic ups and downs – which is one of the many reasons to celebrate Employee Ownership Month in October. As companies navigate today’s rocky business landscape, the strengths behind an ESOP structure can position them to better address current challenges.

Over the past few years, organizations of all sizes and across every industry have faced a host of pitfalls and problem areas. From staffing shortages and supply chain disruptions to rising interest rates and the continued inflationary environment, few businesses have had a smooth path. Many ESOPs, however, have had an edge over competitors with traditional business structures due to the unique advantages and added resilience that ESOP companies enjoy.

Unlocking Prosperity: The Advantages of ESOPs for Employees and Employers

Employee ownership isn’t a rarity by any means; the U.S. had about 6,500 ESOPs in 2020, including 225 created that year. Together, these plans cover close to 14 million participants who hold retirement assets approaching $2 trillion in an ESOP.[i] Their growing popularity has an easy explanation: Both employers and employees stand to gain from this type of business structure.

ESOP participants tend to feel more confident about their financial future and ability to retire comfortably than workers who don’t participate in one of these plans.[ii] It’s not just a feeling, either. A 2021 study showed that employees with access to an ESOP had significantly higher retirement savings than workers at companies with 401(k) plans – and that ESOP employer contributions to employee retirement accounts were over 2.5 times greater than those by 401(k)-only companies.[iii]

So, what’s in it for the business? Plenty. In fact, there are numerous reasons that any company might want to consider becoming an ESOP, starting with winning the popularity contest. Businesses that offer some form of employee ownership dominate Fortune’s list of the 100 Best Companies to Work For year after year. ESOPs took six of the top 10 spots on the 2023 list, but those aren’t the only wins associated with ESOP status.

When Times Get Tough, ESOPS Hold Strong

Before the pandemic hit, data showed that ESOP companies grew faster and exhibited greater profitability than businesses with a traditional ownership structure.[iv] In 2018, employees were laid off 6.2 times more often at non-ESOP entities than ESOPs.[v] Employee-owned businesses were also far more resilient during recessionary periods, staying in business 75% more often while traditional organizations fell by the wayside.[vi]

When COVID-19 devastated restaurants and other businesses across the country, ESOPs dramatically outperformed other organizations in terms of job retention, hours, salaries, and protective measures for their workers.[vii]

And ESOPs didn’t just retain more jobs in that difficult period; a study that controlled for industry, region, and company size showed S corps with ESOPs also created more jobs in 2020. Employees at food-related ESOPs had greater access to employer-subsidized healthcare, which probably helped retain workers, and the companies themselves were more likely to grow revenue in 2020 compared to 2019.[viii]

ESOPs Provide Stability Amidst Modern Business Challenges

Today, businesses in many industries are facing a common set of challenges – chief among them, attracting and retaining the skilled workers they need to thrive. As of August 2023, the number of unfilled vacancies ranged from roughly 20% in the wholesale and retail sector to nearly 50% for businesses that perform financial activities.[ix] Professional and business services weren’t faring much better, with the leisure and hospitality sector struggling only slightly less.

Amid pervasive staffing shortages, it helps to be a company where employees want to work. Employee-owners are better paid and receive more benefits through their jobs than do other workers. That translates to higher household net worth and more opportunities for educational and professional advancements – and, not surprisingly, a higher median job tenure.[x]

In addition to hiring challenges, many industries are experiencing rapid consolidation as companies compete for economies of scale, expand vertically to combat supply disruptions, and try to position themselves for market strength. Here again, ESOPs hold a distinct advantage. While around half of M&A deals by companies with a traditional ownership structure fail, more than nine out of ten acquisitions by employee-owned companies succeed, with fully completed business transactions that lead to the hoped-for gains in productivity.[xi]

Their impressive success rate stems largely from the intense focus on company culture and employee retention that’s built into the fabric of the ESOP structure. And that strong culture creates advantages that can also help as companies look to overcome problems like inflationary pressures and higher costs for capital driven by elevated interest rates.

ESOP Culture Is Key

Culture at employee-owned companies may be the strongest differentiator for these businesses and the secret sauce that underlies many of their more quantifiable advantages. It’s easy to see how employee owners make for a happier work environment that’s responsive to workers’ needs, with added flexibility in addition to top-tier compensation and benefits. Feedback is frequent at ESOP businesses, in both directions.

Less obvious, but perhaps even more important, is the way ESOP culture keeps everyone on the same page. An ownership stake means every team member has skin in the game and works toward the same goals – and everyone can see and understand those goals. The higher level of transparency at ESOPs ensures organization-wide visibility for the company’s financial goals and its progress toward meeting them. As owners, individual workers feel more responsible for how their own actions impact company goals and are highly motivated to advance them.

It’s not that ESOPs are immune to the many problems that can beset any business today. But when challenges inevitably arise, the closer relationship between employees and management gives ESOPs a head start on finding workable solutions. Open lines of communication and relatively higher engagement facilitate a coordinated approach to problem-solving that’s informed by input from many perspectives, which increases the chances of success.

Transitioning to Employee Ownership: A Strategic Move

Becoming an ESOP can be a great way to advance critical business goals. Whether it’s part of a succession plan or a stand-alone move designed to maximize productivity, profitability, and team-wide well-being, adopting an employee ownership model is often a sound strategic move. KSM made the transition years ago and we’ve never regretted doing so.

No matter where you are in your planning process, reach out to a KSM advisor or complete this form to discover more about ESOPs and other succession strategies.

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Sources:

[i] https://www.nceo.org/articles/employee-ownership-by-the-numbers

[ii] https://esca.us/wp-content/uploads/2021/05/Zogby-Retiree-Comparative-Study.pdf

[iii] https://esca.us/studies-and-surveys/study-by-nceo-finds-that-employee-ownership-provided-resiliency-and-financial-security-during-crisis/

[iv] https://www.nceo.org/articles/esops-improve-performance-employee-benefits

[v] https://www.esopassociation.org/articles/employee-owned-companies-have-fewer-layoffs

[vi] https://research.upjohn.org/cgi/viewcontent.cgi?article=1259&context=up_press

[vii] https://assets-eof.s3.us-east-2.amazonaws.com/assets/public/2020-10/EOF_CovidResearch_Oct23b.pdf

[viii] https://esca.us/studies-and-surveys/study-by-nceo-finds-that-employee-ownership-provided-resiliency-and-financial-security-during-crisis/

[ix] https://www.uschamber.com/workforce/understanding-americas-labor-shortage-the-most-impacted-industries

[x] https://www.ownershipeconomy.org/

[xi] https://www.fiftybyfifty.org/2019/10/a-promising-path-to-growing-the-employee-owned-economy-acquisitions-by-existing-firms/