By Alex Brill

1350 Connecticut Ave. NW | Suite 610 | Washington, DC 20036

www.matrixglobaladvisors.com

Executive Summary

Policymakers’ interest in tax reform has increased dramatically in recent years as a consensus on broadening the tax base and lowering marginal tax rates has emerged.

As such base broadening would necessitate curbing or eliminating certain tax expenditures, this paper examines the economic impact of the preferential tax treatment of employee stock ownership plans (ESOPs). Through a comprehensive literature review as well as a new analysis of ESOPs sponsored by S corporations (S ESOPs), this paper demonstrates how ESOPs—and in particular S ESOPs—contribute positively to job creation in the U.S. economy by promoting employee commitment.

The existing academic literature confirms that the level of employee commitment is an important driver of firms’ productivity, growth, and job stability. ESOPs have been shown to facilitate firm performance and job stability in large part because they foster loyalty to the company among employees. This evidence of the connection between worker loyalty and firm performance begs the question: how can companies foster employee commitment? One answer is through employee ownership, and one proven way of successfully establishing employee ownership of firms has been through S ESOPs, which are often 100 percent employee owned. S ESOPs foster a workplace culture of participation and commitment. Previous research has shown that, by facilitating employee ownership of firms, S ESOPs can lead to higher wages, greater job stability, and higher retirement plan contributions. This paper presents original analysis of both a proprietary survey of S ESOPs and Department of Labor (DOL) data on S ESOPs. The key findings of this analysis include the following:

  • A survey of members of the Employee-Owned S Corporations of America (ESCA) demonstrates that S ESOPs showed more employment growth in the pre-recession period of the previous decade than private U.S. firms generally.
  • The surveyed ESCA members regained momentum more quickly after the recession than private firms.
  • On net, employment among the surveyed firms increased over 60 percent during 2001–2011, compared to roughly no change in total private, nonfarm employment in the United States during the same period.
  • DOL data show that the number of S ESOPs and the number of S ESOP active participants have each more than doubled since 2002.
    Active participation among S ESOPs that have existed since 2002.
    Active participation among S ESOPs that have existed since 2002 is also up. In particular, in 2007, when the recession hit, private U.S. employment took a dramatic downward turn while active participants among this subset of S ESOPs actually increased.
  • Many S ESOPs are in the manufacturing industry, where employment has been trending downward in the United States for the last decade. Compared to U.S. manufacturing employment generally, the S ESOP structure has buffered S ESOP manufacturing firms.
  • Active participation among S ESOPs that have existed since 2002 is also up. In particular, in 2007, when the recession hit, private U.S. employment took a dramatic downward turn while active participants among this subset of S ESOPs actually increased.
  • Many S ESOPs are in the manufacturing industry, where employment has been trending downward in the United States for the last decade. Compared to U.S. manufacturing employment generally, the S ESOP structure has buffered S ESOP manufacturing firms.