ESOPs: Key to Recession Survival

The benefits of Employee Stock Ownership Plans (ESOPs) are numerous, and the list keeps growing. Research indicates that this form of employee ownership, which is known to increase employee productivity and retention, may also provide security in times of economic downfall.

Researchers analyzed data spanning 11 years and covering two recent recessions (those starting in 2001 and 2008). When comparing the Department of Labor’s Form 5500 with the Standard & Poor’s data on public companies, ESOP companies were shown to be less likely to suffer bankruptcy or liquidation. In fact, the odds for companies without an ESOP to endure bankruptcy were twice as high compared to their ESOP counterparts.

For companies with higher amounts of employee-owned stock, the benefits are even greater. The book How Did Employee Ownership Firms Weather the Last Two Recessions, in which the findings of this study are reported, notes the following:

“Firms with an extra $1,000 of EO stock were linked to a 22.4 percent lower risk of experiencing bankruptcy or liquidation in any given year during the 1999-2020 period.”

What could be the reason for this considerable difference? The authors, professors Fidan Ana Kurtulus (University of Massachusetts – Amherst) and Douglas Kruse (Rutgers University) note that previous research has shown a causal connection between group-based incentives and economic performance. They also state that shared pay is a strong motivator for higher individual performance, with or without other motivators like decision-making autonomy.

The power of ESOPs is deeper than outlasting recessions at the firm level, however. The authors state that company survival, a likelihood in the case of ESOPs, benefits everyone through lower and less widespread job loss. Ultimately, as the economy rises and falls, ESOPs remain steadfast in their benefits. To see if ESOPs or other forms of employee ownership are viable for your business, click here to contact Dan Markowitz today.