Editor’s note: This is part one of a six-part series in which Peter Newman, CFA, of Peak Wealth Planning, explains the benefits of employee ownership for the U.S. workforce. There are more than 6,500 Employee Stock Ownership Plans, or ESOPs, in the U.S. covering almost 14 million employees. Part two of the series, about ESOP basics for employees, will arrive Oct. 11.
2021 was the year of the “Great Resignation,” a phenomenon where a significant number of employees voluntarily left their jobs in search of better work conditions and increased job satisfaction.
If you are dissatisfied with your job and want to explore other opportunities, consider looking into an employee-owned company.
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Companies offering employee ownership grant their workforce a direct interest in the organization through an Employee Stock Ownership Plan (ESOP). About 6,500 ESOPs exist in the U.S., contributing to five key advantages.
1. ESOPs boost employee engagement through wealth distribution.
Employee engagement is crucial for a company because it fosters productivity, innovation and retention, ultimately driving better business performance and growth.
ESOPs make their employees partial owners of the company. They share the rewards and risks that come with that ownership. If the company stock increases, so does the net worth of every employee. As a result, employee owners are more invested in helping the business succeed and more likely to tackle problems they see within the organization.
2. ESOPs offer higher job satisfaction.
Job satisfaction is important for a company, as it boosts employee morale, enhances productivity and reduces turnover, leading to a more efficient and stable workforce.
Employee-owned companies tend to offer higher job satisfaction because employees feel a stronger sense of motivation when they have a voice in shaping company success. According to recent research by the National Center for Employee Ownership, employee-owners are more likely to have higher wages, receive larger retirement benefits and are less likely to lose their job during a downturn than their peers at non-ESOP companies.
3. ESOPs have greater job security.
Job security is important because it fosters a sense of stability, confidence and enables employees to focus on their work, leading to increased productivity, well-being and overall satisfaction in personal and professional lives.
Employee-owned companies are more likely to prioritize long-term stability over short-term profits. This can result in greater job security for employees, as these companies are less likely to engage in mass layoffs or drastic cost-cutting measures that negatively impact employees. There is evidence that companies owned by employees grow faster due to the alignment of interests in wealth building for ESOP participants with employer goals. The company’s growth increases its overall enterprise value as well as the shares of stock in each participant’s retirement account.
4. ESOPs keep jobs local.
Keeping jobs in the local community stimulates the economy, fosters community development and reduces unemployment. Many selling owners treat their employees like a family.
Through employee ownership, ESOPs invest in their communities and reduce the likelihood of outsourcing or relocation. This can bring long-term stability and strengthen the local community.
ESOPs allow private company owners to sell all, or a portion, of their company to the employees. This creates a market for the company’s stock without having to look months or years to find the right buyer. ESOPs enable owners to retain and reward employees who helped make the company a success. These owners and employees often live and work in the communities where the company operates. Selling to employees offers the possibility of keeping jobs local instead of selling to a private equity buyer that may move the operations to another city for economies of scale. By selling to employees, a retiring owner can ensure that their customers and employees will continue to benefit one another.
5. ESOPs build personal wealth.
The objective for job seekers is to secure a role that aligns with their abilities and meets their desired financial compensation, ensuring a fulfilling and satisfactory employment experience.
Besides offering competitive salaries and comprehensive benefits, ESOP companies provide employees with unique wealth-building opportunities in the Employee Stock Ownership Plan (ESOP).
An ESOP is a company-funded retirement plan, which typically requires no out-of-pocket contributions from employees. These plans have been cited as a major contributor to narrowing the wealth inequality gap.
For many people, funding a contribution to a 401(k) each paycheck is a struggle. For employees like these, an ESOP might be the only retirement plan in which they can afford to participate. In fact, among a surveyed group of low- to moderate-income employee owners, those in the age bracket of 60 to 64 had 10 times greater wealth than the average American in the same age group. The average value held by employee owners in company ESOPs is over $129,000.
Planning your next career move
If you are intrigued by the prospect of working for an employee-owned company, consider the following resources to get you started on your next career move:
If you do consider an employee-owned company for your next position, remember to look at the total benefit package. This includes salary, bonus, health care, dental and vision benefits, 401(k), ESOP and other benefits, such as time off, education reimbursement and gym or wellness benefits. While the ESOP can be a wonderful benefit, it should not be your sole criteria.
If you already have the good fortune of working for an employee-owned company, future articles in this series will cover retirement planning and details ESOP participants should know about their benefits. Our next article will cover the mechanics of how an ESOP benefits its employees, including: vesting, stock valuation, getting paid with distributions and tax treatment.
Are you comfortable with your progress toward retirement? Are you confident you’ll know how to handle your ESOP diversification and distribution when the time comes? Do you need help forecasting how your ESOP and 401(k) can generate retirement income? A wealth manager from the Peak Wealth Planning team can assist.
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
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