Employee Ownership Gains Big Momentum
CBS’ “Sixty Minutes” devoted a segment to it. An Aspen Institute forum about it sold out. And Blackstone joined KKR in sharing it with workers in its portfolio companies.
The growing interest in employee ownership, to which I’ve devoted my adult career as founder and CEO of Verit Advisors, is impressive. So much has happened recently on the employee ownership and related employee stock ownership plan, or ESOP, fronts that our three-year-old prediction that this would be the Decade of the ESOP has panned out not even halfway through the 2020’s.
The broad-based trend is encouraging. It’s taken decades for employee ownership and ESOPs to gain widespread interest. The latest stats from the National Center for Employee Ownership estimate ESOPs at 6,533 in 2021, up 1% from 2020. Participating employees were estimated at 14.7 million in 2021, up 3.7% from five years earlier. Since 2016, an average of 251 new ESOPs have been created annually.
So why the surge in interest now? Is it that folks have caught on that it’s the right thing to do for business owners, high-performing companies, employees and communities? As much as I might like that to be the case, it’s too simplistic an explanation. Rather, several factors contribute to the upswing in employee ownership interest.
Let me note there’s an important distinction between employee ownership and an ESOP. Employee ownership is the broader term for broad-based employee participation in the equity growth of the business where they work. For example, private equity giants Blackstone and KKR aren’t forming ESOPs when they share broad-based participation in equity growth in their portfolio companies with workers. The same is true with Ownership Works, the nonprofit launched in 2022 by KKR that has enlisted dozens of companies and others to help public and private companies expand broad-based participation in equity appreciation.
The distinction is important. Skeptics wonder if private equity has gotten on the employee ownership. bandwagon simply as a means to boost employee productivity. Employees of private companies snapped up by private equity firms often aren’t that happy because they fear that budget cuts, layoffs, and a threat to their job security will follow as the PE firms, sometimes criticized as “asset strippers,” seek strategic and operational improvements to bolster profits and growth.
Workers’ fears are not unfounded. A November 2023 analysis by the National Bureau of Economic Research found that employment at retail companies acquired by PE firms fell by 12% over five years. Researchers who analyzed almost 10,000 debt-fueled buyouts between 1980-2013 found that employment fell by 13% when a PE firm took over a public company.
Still, any meaningful broad-based sharing of equity growth at portfolio companies is a major win for employees – and should be applauded. It may make a PE firm that shares equity a more attractive buyer for companies while balancing the impact of steps that reduce employment to improve financial performance, change lives and transform communities.
Just glimpse this video of C.H.I. Overhead Doors employees when they heard they would be receiving an average payout of $175,000 from KKR’s sale of its PE company to Nucor Corp. in 2022. (KKR and its investors made 10 times their initial investment on the deal.) A win for all.
Other reasons explain employee ownership’s Big Mo. Consider these NCEO research findings:
- Voluntary quit rates by ESOP employees are roughly one-third of the national average. Given how super expensive it is for companies when an employee quits, this is a significant reduction.
- ESOP workers early in their careers, ages 28-34, had 92% higher median household net wealth, 33% higher median wage income, and 53% longer median job tenure.
- Employee owners at S corporation ESOPs possess, on average, more than double the retirement savings of non-ESOP counterparts. Similarly, under the KKR employee-ownership structure – a broad-based sharing with workers of the growth in their company’s equity value – the average non-senior-executive employee should earn six-to-12-months’ salary if company goals are reached. At 40 KKR companies with that structure, billions of dollars of equity have been distributed to over 100,000 working families, KKR estimates.
- Related, a 2020 study by the Rutgers School of Management and Labor Relations and the Employee Ownership Foundation found that ESOPs outperformed non-ESOPS in job retention, pay, and workplace health safety throughout the COVID-19 pandemic. ESOPs were three-to-four times more likely to retain staff and less likely by half to make pay cuts.
- As for engaged employees, ESOP companies report increased staff motivation and engagement and greater loyalty along with an increased sense of job security.
Another factor explaining the rise in ESOP employee participation, as I’ve written recently, is the acceleration by ESOPs in acquiring ESOPs and non-ESOPs, which places the acquired companies’ employees in their ESOP plans
Congress and a growing number of states also have taken notice of employee ownership’s benefits. In 2022, for instance, Congress adopted a new pro-employee ownership program within the U.S. Labor Department, including creation of an Employee Ownership Initiative office, that included over $50 million in funding over five years and expansion of the 1042 tax benefit for S corporations, among other employee-ownership benefits. Plus, half of the states now have state employee ownership centers, amd they serve as hubs for outreach and education about the benefits of employee ownership.
All of these resources are contributing to lessening the complexities of employee ownership that have often prevented business owners and financial owners from pursuing or recommending ESOPs. The dynamic support in Congress and the states and by private equity giants like KKR and Blackstone, along with a growing appreciation of employee ownership’s benefits, portend continuation of the momentum that already has made this, indeed, the Decade of the ESOP.