Employee Ownership Builds Assets for Low- and Moderate-Income Workers and their Families

New report show how ESOPs can close wealth gap

In a new report from The Rutgers Institute for the Study of Employee Ownership and Profit Sharing, the authors report that employee ownership contributes significantly to the ability of low and moderate-income workers and their families to build assets. With funding from the W.K. Kellogg Foundation, the research team conducted a qualitative study in which they interviewed nearly 200 employees at 21 ESOP companies in 16 states, across multiple industries. The research focused on understanding how employee ownership benefits the least skilled, or least valued workers, those with incomes at or below the median household income (for 2017, $61,372). For the most part, the interviewees were long-term employees, with nearly three quarters having been with their company at least 15 years.

Low Income Workers Less Likely to Be Owners
National data shows that employee ownership is not evenly distributed over income groups. According to the data in the report, 7.1 percent of workers from low-income families are employee owners, compared to 30 percent of workers from high-income families. Males are also more likely to be employee owners than females, and those between the ages of 35 and 54 have the highest rates of employee ownership.

ESOP accounts significantly improve family economic stability and financial security.

For low-income workers with an ownership stake, the evidence shows that ESOP accounts significantly improve family economic stability and financial security. National data shows half of employee owners with low household income have an ownership stake that is 12 percent or more of their annual family income.

Research Findings
The study found that five specific practices of employee-owned firms contribute to building employee wealth:

  1. Building ESOP account equity and financial knowledge. Most importantly, the authors note, ESOP account equity does not require any contribution from the employee and thereby doesn’t impinge on the family budget. In addition, ESOP value is not taxed while earned, and it is not considered an “asset” when a family applies for public benefits such as food, housing or heating assistance. These aspects of ESOP equity accumulation are particularly important for low and moderate earners, who would otherwise be unable to save. For employees like Joe, an African-American man with a high school diploma earning $25/hour, being an employee owner has made a world of difference. As he noted, he started work as a “poor man,” but he now has retirement assets worth $220,000.
ESOP account equity does not require any contribution from the employee and thereby doesn’t impinge on the family budget.

2. Expanding workforce capabilities: ESOP companies tend to provide more opportunities for developing leadership, communication, financial and other skills. These skills, the authors note, can be leveraged for better jobs and thereby “greater wealth, security, and stability.” Notably, ESOPs want employees to stick around, as high rates of turnover could undermine the company’s financial health. This tends to encourage greater emphasis on mentorship, coaching and helping employees continue their formal education.

3. Enabling asset preservation and investments: Though formally retirement accounts, ESOP accounts are important to intergenerational family investments. At a certain age, employees can withdraw funds from their ESOP account, and a number used their accounts to help children with college tuition or a down payment on a home. In addition, an ESOP account acts as a kind of death benefit, since it is passed to the family if the employee dies.

A number of ESOP companies also helped employees stay out of debt by allowing employees to borrow against their accounts or providing no-interest loan opportunities. Linda accumulated $266,000 in her ESOP account over 24 years. She told an interviewer, “My company was here for me and for others when there were hard times. Like when my mother was sick . . . and I had some big extra expenses, they made me a small no-interest loan. . . That really helped my family keep from going in debt with credit cards . . . And, I borrowed from my account to help my daughter with college.”

“I feel more secure at an employee-owned company. [I] also feel that there is less conflict between employees . . . Management and co-workers care about me, not just as an employee but as a person.” — Donna, an ESOP employee

4. Increase access and inclusion by gender, race, and ethnicity. In the ESOPs studied, women and people of color fared much better than women and people of color nationally. Latinx ESOP employees included in the sample had 12 times the median wealth of Latinx families nationally ($250,000 as compared to $21,000). Black ESOP employees had 3 times the wealth of Black households nationally (nearly $60,000 as compared to $17,400). Notably, Black ESOP employees interviewed for the study had less tenure with their companies than other workers.

Latinx ESOP employees included in the sample had 12 times the median wealth of Latinx families nationally ($250,000 as compared to $21,000). Black ESOP employees had 3 times the wealth of Black households nationally (nearly $60,000 as compared to $17,400).

Women also accumulated greater wealth as ESOP employees. Median wealth for white women nationally is $15,640; for white women in the study sample, ESOP and 401K accounts combined averaged $225,000. Latinas had accounts averaging $243,500, while Black women had $55,000 in their accounts.

As the authors note, it is clear that the asset building effects of ESOP accounts is significant, but occupational segregation and discrimination still hinder wealth accumulation. Women and people of color had a harder time moving into higher paying jobs where they could achieve higher wages and contributions to their retirements.

5. Improving health and well-being through quality of work life and balance. The firms in the study sample showed real concern over issues such as work-life balance and maintaining a healthy lifestyle. Donna, divorced and in her 60s, told the interviewers, “I feel more secure at an employee-owned company. [I] also feel that there is less conflict between employees . . . Management and co-workers care about me, not just as an employee but as a person.”

Good health, the ability to parent and maintain a household, the authors argue are important aspects of intergenerational wealth transfer. “Good health enables asset building by enabling focus, resources for investment, and the ability to sustain steady participation in work — thus securing a regular income and potential income increases over time and reducing the risk of debt.”

Policy Recommendations 
The study confirmed that ESOP employees are able to accumulate assets and build financial security far beyond what is available to low- or moderate-income workers without an ownership stake. To grow employee ownership, the authors make several recommendations for federal, state, and local policymakers, including:

  • Allow for preferred status certification for women-owned, veteran-owned and minority-owned ESOP companies, which are currently excluded from these preferences in state and federal contracting because the firm is technically owned by the ESOP Trust.
  • Expand state centers for employee ownership to provide resources and technical assistance to scale employee ownership.
  • Use Opportunity Zones fund investments to finance ESOP conversions.

The authors suggest there are important roles for all the varied stakeholders — philanthropy, academia, private investors, organized labor and community advocates — in growing employee ownership. As they note, employee ownership provides a clear bipartisan path to address the nation’s growing wealth gap. Now is the time to carry this shared agenda forward.

Karen Kahn provides communications consulting and editorial support for Fifty by Fifty.


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