We recently shared some insights on why employees love Employee Stock Ownership Plans (ESOPs). However, employees aren’t the only party that can benefit from ESOP implementation—advantages are experienced at the company level, too. In this article, we outline several reasons why companies love ESOPs.
Talent Acquisition and Retention
As described in “Employees Love ESOPs,” ESOPs provide several key benefits that can help the company attract, motivate and retain quality employees. These include a valuable retirement benefit, job stability, and enhanced company culture, among others. In today’s highly competitive labor market, ESOPs provide a recruiting edge that other firms simply cannot match.
Not only do ESOPs help companies attract talented employees, they also improve retention of employees once hired. According to the 2018 National Longitudinal Survey (NLS), the median tenure of employee owners was 46% greater than non-employee owners. This retention is due to the non-financial benefits of ESOPs, such as pride in ownership, improved health benefits, and enhanced company culture. With lower turnover, the company retains more institutional knowledge and expertise, minimizes the costs of hiring and training, and improves the employee experience. In addition to the non-financial benefits, the fact that individuals can earn a meaningful retirement benefit keeps employees engaged.
Company Performance
With a significant financial interest tied directly to the performance of the Company, ESOPs are known to keep employees focused on share price appreciation and corporate performance. In fact, the National Center for Employee Ownership (NCEO) cites numerous studies that show increased productivity and enhanced performance after the adoption of an ESOP. NCEO also notes that the highest-performing ESOPs are those that are managed with an open book methodology and a great culture. After all, ESOPs should not be used to save troubled companies—they’re most effective in making already successful companies even better.
Enhanced performance is especially important during times of economic downturn. Many studies have demonstrated that employee-owned companies are more resilient and sustainable amid economic hardship, compared to their non-employee owned counterparts. Read our article on this topic, to learn how ESOP companies continued to survive and out-perform during the last two recessions.
Tax Advantages
ESOPs may be known as a tax-advantaged ownership transition strategy, but ESOP tax savings aren’t just for selling owners. With S-Corps pass-through income being tax exempt at the ESOP Trust, the tax savings can be significant. When the company retains these tax dollars, they have more flexibility to invest in other areas of the business, leading to growth and increased profitability.
Community and Customer Support
ESOPs allow the company to maintain and strengthen ties in the community in several ways. For example, an ESOP transaction means the company will not merge with a larger firm that will change it beyond recognition or close its doors for good. So, the ESOP keeps the company’s hard-working staff employed, and the business rooted in the community and contributing the local economy. Additionally, an ESOP typically allows for the owner to potentially stay involved in the business post-transaction, so the owner’s valuable community relationships—with employees, vendors and customers—are retained.
ESOPs can also play a powerful role in counteracting wealth inequality by providing stock ownership opportunities to workers who may not otherwise afford the opportunity for investment. See our short article for more on this topic. This goodwill may translate to customer support—a survey from the Employee Ownership Foundation found that 38% of responding customers preferred to buy from employee-owned companies.
Helping You Get There…
With these advantages and more, it’s easy to see why companies love ESOPs. To learn more about ESOPs and whether this form of employee ownership is right for you and your company, connect with our ESOP advisory leader, Dan Markowitz, today.