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How an Employee Ownership Culture Cultivates Financial Stability and an Engaged Workforce

October 20, 2022

Most people know October as a month of brisk weather and colorful leaves capped off by the fun of Halloween, but there’s more: October is also Employee Ownership month. Though that fact may not get as much attention as football or pumpkin spice, it’s certainly something to celebrate — especially for the roughly 14 million American workers who participate in an employee stock ownership plan (ESOP).

ESOPs provide company employees with an ownership stake in the organization. These plans are the most common form of employee ownership in the U.S.; there were 6,482 privately held or publicly traded ESOP companies in 2019, the most recent year for which data is available, and there’s ample reason for that popularity. When it’s time to formulate a succession plan, an ESOP merits consideration as an appealing option.

Employee Ownership Supports Better Financial Stability

ESOPs enjoy more resilience in shifting economic conditions and offer significant financial advantages for employees. In fact, one study showed average retirement savings for ESOP participants were more than double the average for all Americans. Even those at the lower end of the earnings spectrum followed the same pattern, with over twice as much saved for retirement as other employees in the same income range (under $26K annually).

A different study found that ESOP S corporations chipped in average annual retirement contributions of $6,567 per participant, whereas non-ESOP S-corps contributed only $2,507 for each of their workers — a difference of 260%. Those employer-side contributions add up, helping employees build wealth in a way that 401(k)s do not; just 31% of total retirement contributions come from the employer at non-ESOP S-corps with 401(k) plans, whereas the figure is an impressive 94% for employer-side contributions at ESOP S corporations.

As companies increase their focus on worker satisfaction with wages, working conditions, and company culture, ESOPs are positioned for success relative to their privately or publicly owned competitors. In a 2019 survey these companies reported wage increases for employee owners that were greater than the 3.1% national average.

And while competition for qualified job candidates and concerns regarding retention of top talent have intensified over recent years, ESOPs have long had the advantage over other employers. Employee owners report that they are paid fairly, and the numbers support that perception. These workers generally earn more than demographically similar peers with comparable jobs at non-employee-owned organizations.

The Allure of an Employee Ownership Culture

Ownership culture is associated with broadly positive employee relationships. Businesses with strong employee ownership plans (including ESOP companies) consistently dominate the list of “100 Best Companies to Work for in America” published by Fortune Magazine each year.

Seventy-two percent of Americans would rather work for a company owned by its employees, exhibiting a strong preference that’s more than theoretical. Employees stay with employee-owned businesses so much longer that these companies enjoy a turnover rate just one-third of the rate at other publicly or privately held businesses.

The strong bond between ESOP companies and their employees increases worker engagement, which can significantly improve business performance in myriad ways that boost the bottom line along with morale. An ownership stake in the company provides added personal incentive to focus on efficiency; 75% of respondents in a 2019 survey said that employee owners were very involved or somewhat involved in managing costs for the company.

Weathering the Storm During Recessions and a Global Pandemic

Employee-owned companies tend to show higher per-employee sales and consistent increases in both revenue and share price. They also exhibit relative strength throughout economic ups and downs, including disruptive events and recessionary periods. Compared to the S&P 500 total return index, ESOP S corps generated a 62% higher total return per participant over the years spanning 2002 to 2012, which included the Great Recession.

Employee-owned firms proved more resilient as well, surviving the two recessions between 1999 and 2011 more often than publicly traded firms without significant employee ownership.

And when restaurants were hit so hard by COVID-19 restrictions in 2020, ESOP companies in food-related industries retained more of their employees and were more likely to increase annual revenue over 2019 than non-ESOP establishments in the same sector. That pandemic-era outperformance isn’t surprising given the strong relationship between employee owners and their employers, and greater access to company-paid healthcare benefits (89% vs. 71%) probably contributed to employee loyalty.

One Succession Strategy Among Many

The pandemic may have highlighted the benefits of employee ownership but data shows that ESOPs perform well in many different environments, for businesses of many sizes and across varied industry sectors. However, while employee ownership can confer many advantages, it’s certainly not the only option businesses should consider when planning for transition — nor is the path to an ESOP always simple.

Managing an existing ESOP company or selling to a newly formed ESOP often presents opportunities and challenges unique to this type of business structure.

How KSM Can Help

KSM professionals share a firsthand understanding of the distinct advantages an ESOP provides as well as the challenges. Since implementing our own ESOP in 2001, we have enjoyed the many benefits and navigated the same obstacles that companies may face in becoming fully or partially employee owned.

KSM serves as business, tax, accounting, consulting, and valuation advisors to employee-owned companies across a variety of industries, providing professional services that support organizations from ESOP consideration (feasibility studies) to the closing of the transaction. We offer in-depth knowledge, experience, and resources to help manage an ESOP’s many moving parts, protect assets, and provide innovative ideas and guidance to navigate this complex structure.

Wherever you may be in your planning process, we invite you to learn more about ESOPs and other succession strategies by reaching out to your KSM advisor or completing this form.

Andy Manchir Partner, Business Valuation & ESOP Services

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