A Better Way to Save Jobs: Employee Stock Ownership Plans

ESOPs give employees part ownership of their companies and prevent major job losses when owners retire. But only two states support them.
by | June 2014
Workers assemble cars along a line at the General Motors Fairfax plant in Kansas City, Kansas. AP/Orlin Wagner

Do you recall the single word of advice for achieving prosperity that Dustin Hoffman was given in The Graduate? “Plastics.” Well, Chris Mackin has a one-word prescription for public officials looking to reduce economic inequality and increase prosperity: “Assets.” Mackin, who for eight years ran a program for the state of Massachusetts focused on employee ownership, calls assets “a seemingly magical set of resources that work for anyone who owns them.” A powerful way to get assets into the hands of workers is through employee ownership.

A look at the data confirms the power of employee ownership, the dominant form of which is through employee stock ownership plans (ESOP). During the Great Recession, the average job loss for U.S. companies was 12 percent. For ESOP companies, it was only 2.5 percent. ESOP companies grow about 2.5 percent a year faster than the average company, and employees get two and a half times as much in retirement assets as other employees. In 2013, while 7.3 million private-sector workers belonged to unions, more than 12 million were employee-owners.

ESOPs are qualified retirement plans that are invested primarily in the common stock of the sponsoring company. The mechanics of creating an ESOP can be intimidating for employees and owners. The capital needed for an ESOP is generally supplied through debt, and the owner has to pay for an independent appraisal of the value of the business. Then the legal trustees of the employees have to sign off on these valuations.

This is where important roles for public policy come into play. State and local governments could start by surveying businesses to find out their succession plans, seeking healthy companies with owners who will soon retire and explaining the process to them.

They could offer to pay a portion of the cost of an appraisal, which would be a small fraction of the billions that governments now pay in tax and other incentives aimed at job creation and business retention.

Thousands of baby boomers are turning 65 every day, and many of them are business owners looking to sell out and retire. When the sale is to a competitor, a larger corporation or an out-of-state company, there is usually job loss. With conversion to employee ownership, the workers keep their jobs and the community keeps the company. Therefore, it’s surprising that only two states, Ohio and Vermont, currently have programs focused on supporting conversion to employee ownership.

But interest seems to be picking up, according to the Center for Employee Ownership, which has model language for states to adopt. The center is working closely with Oregon’s business development department, and legislation supporting ESOPs is under consideration in Iowa and Connecticut.

Employee ownership is hardly a new concept. It was a favorite of the late U.S. Sen. Russell Long of Louisiana, who explained his enthusiasm for it this way: “The problem with capitalism is that there are not enough capitalists.” Long was a public official who understood the power of assets.

Mark Funkhouser  |  Director, GOVERNING Institute
mfunkhouser@governing.com

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