ESOPs – Why They Work

October is employee ownership month and we’re celebrating our ownership throughout the month here at SEP. When we became in an ESOP in 2010, I didn’t quite know what this would do to our culture. We were already a pretty unique company that did great things for our employees, but would it change us? As background, an employee stock ownership plan (ESOP) is an employee benefit plan, which makes the employees of a company beneficial owners of stock in that company.

Several features make ESOPs unique as compared to other employees benefit plans. First, only an ESOP is required by law to invest primarily in the securities of the sponsoring employer. Second, an ESOP is unique among qualified employees benefit plans in its ability to borrow money. Currently, there are approximately 10,000 ESOPs in place in the U.S. covering more than 10.3 million employee owners (I still get a little giddy knowing that we are owners). The growth of ESOP formation has been influenced by federal legislation. While the rapid increase in new ESOPs in the late 1980s subsided after Congress removed certain tax incentives in 1989, the overall number has remained steady with new plans replacing terminated ESOPs.

What makes them special? Research conducted by Dr. Joseph Blasi and Dr. Douglas Kruse of Rutgers University shows that ESOPs can improve productivity, increase employee involvement, and sales.

The Ohio Employee Ownership Center also did a study with Kent University on ownership cultures. They explain that equity makes a big difference. Consider the difference between renting and owning a home. Unlike a person who rents, the home owner has equity in his or her investment and therefore will have an incentive to increase the value of that investment. After all, how many renters do you know that paint the outside of their residence?  Just like a homeowner, an employee-owner has a greater incentive to drive the value of stock in his or her company. This could result in reducing scrap, generating creative ideas on how to improve a process, and producing better quality products. When employees have an ownership interest in their company and are valued for their input, their jobs become more meaningful. Satisfied employees as well as satisfied customers stay with the company longer.

Our transition to an ESOP hasn’t really changed who we are as a company. We were one of the lucky ESOPs that were “living” an ownership culture before we actually even knew what one was. Making it an official “thing” really just made it a whole lot more meaningful.

Most of us at SEP are far from retiring, but there’s that extra sense of comfort knowing that we have this amazing benefit that I’ll surely reap the rewards from some day.