Employee Ownership: Capitalism for the Left, Right, and In-Between
Politicians, pundits, and most of the rest of us think economic inequality is a major problem, but finding common ground on ways to address it has been wrenchingly difficult. Higher minimum wages will help several million people at most, but do little to address underlying problems. In part, that’s because changes in wages and job training do not address the root of the problem, namely that the growth of technology and capital has meant that owners of capital are reaping more and more of the gains in the economy relative to people working for them. While real wages have been stagnant since the 1970’s, returns to capital have been impressive. The Dow had only three digits in the 1970 and five today.
There is one approach to economic inequality that has wide political support, a demonstrated record of success, and great untapped potential — broadening employee ownership.
Ronald Reagan loved the idea. Bernie Sanders has legislation to promote it. The Center for American Progress says it is an essential tool to create “inclusive capitalism.” Paul Ryan, Ran Paul and lots of other Republican leaders like it too, as do all three of the largest political parties in the UK.
Employee ownership can involve employees buying stock, but most broad-based employee ownership in the U.S. allows working people to become owners without their having to cough up scarce dollars to do so. Then they could participate in capital growth as well.
Broad-based employee ownership plans, whether through company-funded employee stock ownership plans (ESOPs) or widely granted stock options and similar plans, are actually quite common in the U.S. But they would be much more common if opinion leaders started to take the idea as seriously as it deserves.
Broad-based employee ownership plans now cover over 20 million employees in the U.S. ESOPs are the most common approach. ESOPs are set up and funded by the company through a trust. The plans are funded by the employer, not the employee, and cover all employees meeting a basic service rule. Over 90% of these plans are in closely held companies, where they are usually used as a means to provide for business transition. Congress has granted these plans and owners selling to them significant tax benefits.
There are over 9,000 ESOPs and similar plans in the U.S. They cover over 13 million people. They have over $1 trillion billion in assets. Many of the plans own a majority of their company. While most of these companies are small to mid-sized, there are also some very large companies as well as many well-known names. Publix Supermarkets with about 170,000 employees is owned by its employees. So is W.L. Gore, maker of Gore-Tex (10,000 employees), and Davey Tree (over 7,000 employees), Lifetouch (a 24,000 employee photography firm), and many others. Fat Tire beer is made by an ESOP company (New Belgium Brewery). Procter & Gamble is one of a number of public companies with a substantial ESOP — in fact, they had the first employee ownership plan in the U.S. going back to the 1890’s. ESOPs are a major part of the U.S. economy, but one that essentially no significant public figure says much about.
Although there have been notable ESOP failures, such as at the Tribune Company and United Airlines, overall ESOPs have been strikingly successful. The General Social Survey reports that employee owners are one-third to one-fourth as likely to be laid off as employees who are not in these plans. ESOP companies grow about 2.5% per year faster than would have been expected without an ESOP, according to Rutgers researchers. Data from Department of Labor filings show that ESOP participants have about 2.5 times the retirement plan assets of non-ESOP employees and, over the 1990–2010 period, ESOP returns were 9.1% compared to 7.8% for 401(K) plans and were less volatile as well. The default rate on loans to ESOPs from 2009–2013, not the best tears for the economy, was just .2% per year.
ESOPs are not the only way companies can share ownership widely. Companies like Google, Tesla, Starbucks, Whole Foods and many others grant stock options or similar rewards and/or significantly discounted stock purchase plans to all employees. Another several million employees own shares or rights to shares this way, and research shows that these companies also outperform their peers.
ESOPs do not need significant new tax incentives, although a tweak or two might help. What they do need to active promotion of the idea by political and opinion leaders. The idea can stand on its own merits if more people know that is a real option to save taxes, reward employees, and improve corporate performance.
Corey Rosen is the founder and senior staff member of the National Center for Employee Ownership, a nonprofit membership, information, and research organization.