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Employee Ownership Reduces Layoffs and Saves Taxpayer

Two low-cost strategies states can implement to advance ESOPs
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Dave Zuckerman

Many of the benefits of employee ownership are quite apparent. Through owning a portion of stock in her or his company through an Employee Stock Ownership Plan, or ESOP, an employee is part owner and receives not just income, but has the opportunity to build wealth that would otherwise be unavailable in a traditional workplace. As a result, employee-owners have a greater financial stake in seeing the business succeed, which increases employee motivation and reduces the need for costly management oversight. (This is a benefit whose value cannot be overstated considering that Gallup’s 2013 State of the Workplace found that only 22 percent of U.S. employees are engaged and thriving. ­Nearly as many — 18 percent — are not only disengaged but actively so, acting out their unhappiness and undermining the workplace on a daily basis.)

And while employee ownership is not always synonymous with democratic participation in the workplace, employee-owned businesses are more likely to be participatory and have higher levels of worker empowerment. These qualities alone create a compelling case for employee ownership as a means for building individual wealth. Adding to the list, new findings from The National Center for Employee Ownership in partnership with the Employee Ownership Foundation illustrate broader benefits to the economy and the taxpayer. In this paper, Dr. Corey Rosen demonstrated that the employee ownership retention advantage is nearly four times the rate for the overall population and 2.7 times the rate for those with one or more years of tenure, since this data began being tracked in 2002. 

It is hard to overstate the impact of this difference in job security. If employee-owned companies had laid off workers at the same rate as traditional firms then they would have laid off more than 2.28 million people in 2010 — nearly 1.8 million more people than they actually did. On average, Rosen notes that since 2002 “employee-ownership companies retained 1.5 million jobs per year more than they would have if they behaved like other firms.” In addition to preserving jobs in a weak economy, the findings uncovered that the implied federal savings from the lower layoff rates for employee owners — based on the estimated cost of each unemployed worker — is $23.3 billion for the recession year 2010 and $13.7 billion per year for the longer 2002-2010 period.

Nationwide, there are nearly 11,000 employee-owned companies. The strength of employee ownership as a wealth-building and job-creation strategy is clear. Employee ownership as of the end of 2006 was responsible for generating $869 billion in assets for 10.3 million employee-owners – in other words, a per capita retirement account balance of over $84,000.

However, the potential is even greater. In a New York Times op-ed last month, Democracy Collaborative co-founder Gar Alperovitz explored what could be possible, encouraging retiring baby-boomer business owners to sell to their employees rather than to large corporations. As John Logue, the late Founding Director of the Ohio Employee Ownership Center (OEOC), noted, “The failure to plan for business succession is the number one cause of preventable job loss in this country.”

There are multiple policy options that could be implemented to support the transition of small business to ESOPs. As recommended in The Democracy Collaborative’s An Illiniois Community Wealth Building Action Agenda, state legislatures can help the effort by implementing two low-cost strategies.  First, states should aim to replicate the success of the OEOC, housed at Kent State University, which assists retiring owners of family-owned businesses to transfer ownership to their employees. Over the course of more than two decades, the Center has helped employees buy all or part of 92 companies, creating more than 15,000 employee-owners at a cost of $772 per job created and retained. As measured in 2010, wealth created per employee has averaged $40,000. A similar program in other states could achieve similarly stellar results.

Second, state legislatures should create a linked-deposit programs to help finance the conversion of businesses to ESOPs. The way this works is that the state purchases certificates of deposit (on which it earns a low, but positive, rate of interest) that the bank then agrees to re-lend at a below-market rate to finance the ESOP transaction. For example, in 2010, the state of Indiana received 1 percent interest while ESOPs could borrow at 4.25 percent.

This investment of state resources pays off. A 2008 Wharton Business School study found that nationally, as a result of added productivity of ESOP firms, S-corporation ESOPs alone (roughly 40 percent of all ESOPs) return $8 billion a year in added federal income tax revenue —four times the cost of the ESOP tax expenditure. The same study also found that S-corp ESOPs contributed directly to community economic stability, estimating that annual gains from increased job stability” saves employees approximately $3 billion annually.” A report released in April of this year by Alex Brill of Matrix Global Advisors showed the macroeconomic impact to be even greater.

Other benefits of employee ownership, like increased productivity, are being increasingly documented and confirmed. There are many strategies that could be put into practice to expand this opportunity for workers across the country. These are just two actionable ideas that states can adopt tomorrow to improve local economies and help individuals build wealth.