Employees Love ESOPs

You’ve likely heard the saying, “a company’s greatest asset is its people.” As a business owner, you may know this to be true. A business cannot thrive and provide excellent service to clients without employees who are highly skilled, engaged and happy. But in such a competitive labor market, how can you recruit, retain and motivate this exceptional talent?

One option to consider is implementing an Employee Stock Ownership Plan (ESOP). When an ESOP is created, a Trust is established that purchases shares of the company and allocates them to employee participants. When the company share price rises and falls, so does the financial gain of the participants. Then, when employees retire or leave the company, the value of shares is paid out at the most recent appraised value.

The significant benefits ESOPs provide to employees can help your company stand out to prospective talent. Want to know more? Here are several reasons why employees love ESOPs.

Retirement Benefits

As they work toward retirement, employees want peace of mind that they’ll be financially secure in their golden years. Perhaps the most obvious perk of an ESOP in the eyes of employees is the significant retirement benefit it provides.

An ESOP retirement option is unique as it requires no contribution from employees. In other forms of retirement plans, such as 401(k) plans, the benefit is usually based on the funds the employee contributes. Alternatively, ESOP employee-owners earn shares by simply working for the company as a percentage of the employee’s compensation. So, ESOP employee-owners can build a valuable retirement asset without investing any of their own money.

Furthermore, in most ESOP companies, the ESOP shares are offered in addition to a 401(k) plan. A poll of ESOP Association members resulted in 93% of respondents saying they offer a 401(k) along with their ESOP.[1] With two retirement options (and one with no cost to the employee), ESOP participants are likely to have higher savings come retirement. In fact, research shows that ESOP employee-owners typically earn up to 2.2 times the retirement assets compared to employees at similar traditionally owned companies with defined contribution plans.[2]

Job Stability

Employees want to know that they will have continued financial security, even in times of change or economic downturn. ESOPs are proven to offer enhanced job stability, both at the time of the ESOP transaction and over the long term.

ESOPs aren’t just a retirement plan—they’re also seen as a unique and flexible ownership transition strategy, with company owners selling part (or all) of their ownership stake to the ESOP trust. Ownership transition can be a tumultuous time for employees. If the company is merged with a strategic buyer or acquired by a financial buyer, there’s the potential for loss of jobs or a major shift in the company management, operations and culture. Employees who remain with the company must adjust to new expectations and norms under the new owner.

However, this is not the case when the company is sold to an ESOP. In most cases, the ESOP company continues to be managed and run like it was before the ESOP transaction, and often by the same leaders, so there’s less disruption. Thus, ESOPs present a more stable and predictable ownership transition and a sense of security for employees.

Beyond the sale, ESOP companies are known to have lower turnover rates and layoffs in the long run, compared to traditionally owned businesses. This is especially important in times of crisis, like the recent pandemic, during which ESOP companies significantly outperformed non-employee owned companies in the areas of job retention, pay, benefits and workplace health safety.[3]

Culture

For many job seekers, company culture may be a driving factor in the decision to accept a job. When employees feel as though they are a part of something bigger, they are more likely to feel motivated, engaged and valued.

With a significant financial benefit tied directly to company performance, ESOPs have a unique impact on culture, giving employees a sense of pride, ownership and commitment to their work. Together, ESOP employee-owners are part of a community with shared goals, rewards and opportunities. When each member of the ESOP community works hard to increase profits, the benefit is returned to each individual in the form of rising ESOP share value.

In this way, an ESOP culture is one of dedication and teamwork. When ESOP employee-owners see the time and effort they invest in the company and each other as a direct investment in themselves, everyone wins.

Helping You Get There…

With benefits like these, it’s no surprise that employees want to work for an employee-owned business. If you’re considering employee ownership for your company, Boulay’s ESOP Advisory team is here to support you in all stages of the ESOP process. From feasibility studies and plan design to third-party administration, repurchase obligation and sustainability studies, we’re committed to helping you get there.

To learn more about ESOPs and whether this form of employee ownership is right for you, your employees and your company, connect with our ESOP advisory leader, Dan Markowitz, today.