Employee Stock Ownership Plans (ESOPs)

OVERVIEW

Employee stock-ownership plan (ESOP) companies are for-profit entities in which employees own part or all of the companies for which they work. ESOP companies play a critical role in building the tax and wealth base of local communities, as ownership is rooted in the workers who reside in the community, making plant relocations less likely. ESOP companies are also less likely than comparable firms to lay off workers in downturns.

Employee stock ownership plan companies (“ESOPs”) provide a way for employees to accumulate assets, invest in the businesses where they work, and become partial or full owners, enabling these workers to enjoy the equity gains their labor helps create. ESOPs are created through a pension plan with two very unusual features: 1) most of the employee pension money is invested in the company where the workers are employed, and 2) they may borrow against future corporate earnings to purchase company stock. Money or stock the company contributes to fund the plan — either directly or to repay a loan — is tax deductible. The National Center for Employee Ownership (NCEO) estimates that as of December 2006 there are approximately 9,650 ESOPs with some 10.5 million members.

ESOPs provide a number of benefits to workers, their communities, and even former owners. For former owners, the ESOP mechanism provides a way for local owners to cash out when they retire, while helping ensure that local businesses remained in the communities in which they had prospered after the original owners retired. For the communities, ESOPs provide greater employment stability, while maintaining higher productivity. For workers, ESOPs provide a significant source of retirement savings. Basic statistics regarding the employee ownership sector are below: