Employee Stock Ownership Plans (ESOPs)

Description and History

An employee stock ownership plan, or an ESOP, is an ownership model structured as an employee retirement benefit plan (Armeni et al. 2023). Essentially, a trust is set up to hold shares or stock in a revenue-generating company on behalf of its employees. The trust is then capitalized by the company in one of three ways: 1) by the company itself—using its revenues); 2) via loan from the seller; or 3) by borrowing money from a lending institution, like a bank. Whatever the case, the trust then buys the company owner’s (or owners’) stock and redistributes it across employees’ individual retirement accounts. In this way, ESOPs enable full or partial ownership of a business by its workers—without any cash contribution on their part (NCEO 2024). 

The first ESOP was created in 1956 by San Francisco lawyer and economist, Louis Kelso, as a way to shift ownership of a long-standing newspaper from its founders to its employees. ESOPs experienced significant growth in the mid-1970s and 1980s when Congress amended the Employee Retirement Security Act (ERISA) allowing business owners who sell to their employees to defer capital gains taxes (Menke 2011).

In 2021, there were approximately 6,500 ESOPs in the United States with assets over $2.1 trillion covering 14.7 million participants. While distributions vary by state and several employee factors like tenure, ESOPs paid out a total of $175 billion dollars to participants in 2021. ESOPs are particularly popular across the following industries: professional science and technology services; manufacturing; construction; finance, insurance, real estate; and wholesale trade, with about 250 new ESOPs being created each year since 2016 (NCEO 2021). 

A Brief Note about C3SOPs

More recently (Rodgers 2015), ESOPs have become available to large, non-profit organizations through an innovative model called the “C3SOP”. By setting up a for-profit holding company that holds the equity of a for-profit subsidiary, employees of a nonprofit organization can have access to an ESOP capitalized by the parent company purchasing a minority interest in the holding company (Angler West Consultants, Inc n.d.).

Employee Stock Ownership Plans (ESOPs), Inclusive and Democratic Enterprise, and the Community Wealth Building Wedge 

For individual workers, companies with an ESOP provide numerous benefits—from higher wages to better overall benefits compared to traditional firms (NCEO 2018). Research from the Rutgers School of Management and Labor Relations found that employee-owners of color had 30 percent higher incomes than non-employee-owners of color and low-income women made 24 percent more than their counterparts (Boguslaw and Schur 2019), making ESOPs a helpful tool in narrowing the racial and gender wealth gap (Conway et al. 2021). In terms of retirement income, because an ESOP requires no out-of-pocket contribution from individual employees, there is a real opportunity to build personal wealth, especially for low- to moderate-income workers (Newman 2023). In fact, on average in 2018, individual employees at firms with an ESOP held nearly $130,000 in value. 

For companies, ESOPs boost both profits (NCEO 2024) as well as worker engagement, productivity, and retention (Abell 2020). Further, because ESOPs are not controlled by absentee shareholders, the firms that have them are more likely to have employees engaged in the management of the firm as well as the finances of the company (NCEO 2017). Companies with ESOPs also benefit from a range of tax incentives that enable them to have more resources available to invest in the growth and success of the enterprise and make ESOPs an attractive way for owners who want to exit their business while also contributing to the rapid scale-up of employee ownership in the economy (NCEO 2024). That, in turn, enables employees to build lasting wealth through ownership of the company that is prospering through their labor. As ownership is vested in workers who often reside in the community, the model inherently fosters greater community control of labor. Indeed, during economic downturns, ESOPs have laid off 25 percent fewer workers than traditional firms, contributing to the stability and strength of neighborhood economies (ESOP Association n.d.; Newman 2023).

Communities also benefit from ESOPs because their workforce typically lives in the same community in which the business is based; that makes them less likely to relocate or rely on practices harmful to the environment. 

Examples

Publix Super Markets 

Based in Lakeland, Florida, Publix Super Markets is the largest majority employee-owned company in the U.S., with over 250,000 employees (NCEO 2024). The company enjoys significantly higher profit margins than many of its competitors and a much lower voluntary employee turnover rate (five percent) than the industry average (around 65 percent). The average employee’s stock is worth $150,000 (Barry and Hamilton 2022). It is also one of only four companies to have been named on Fortune’s “100 Best Companies to Work For” every year since the list began (Publix 2024). 

It is important to note, however, that while Publix is a good example of an ESOP at scale, the corporation has been known to engage in forced labor and wage theft, particularly of their largely Latinx immigrant agricultural workforce (Seidman 2023). As such, when pursuing such strategies within a market economy, we must acknowledge that they are not an end in and of themselves. Instead, each of these elements is intended to aid in a transition from an extractive and exploitative economic system towards one that is more just and equitable.  

Recology

Recognized as the 2021 ESOP Company of the Year by The ESOP Association, Recology is a 100% employee-owned integrated resource recovery company based in San Francisco, California (ESOP Association 2021). Recology is committed to a “zero-waste” approach, investing in alternative energies, water recycling infrastructure, landfill gas management systems, and routing efficiency software.With over 3,800 employees, Recology provides services to 2.5 million individuals and 100,000 commercial customers in California, Oregon, and Washington (Recology 2024). The company’s ESOP is a supplemental retirement plan alongside a traditional 401(k) or pension.  

Challenges and Limitations 

First and foremost, ESOPs are expensive. The cost of simply setting up an ESOP—estimated at around $125,000—is often cost-prohibitive for small businesses, and much more so when taking into account annual costs for administration and valuation ($20,000 to $35,000, on average). Of course, while smaller enterprises may not be a good fit for ESOPs, they might be so for a cooperative model. 

Another limitation of leveraging ESOPs for CWB is the oft-low level of democratic governance. While setting up an ESOP provides a key alternative to absentee capital ownership of the workplace, it does not automatically by itself make a workplace more democratic in its decision-making, as seen in the Publix example. The scope of governance—and the percentage of shares employees normally hold—differs between publicly held ESOPs, privately held ESOPs, and privately held ESOPs with “full pass through voting” and is an area of growth for this element.

An emerging model, known as the ESOPerative, circumvents some of these governance challenges by providing a more traditional cooperative governance model of “one person, one vote”. In this way, worker-owners can have a say in choosing ESOP trustees, casting shareholder votes, and electing the board of directors, thereby enabling democratic participation in all ESOP-related decision-making (Armeni et al 2023). 

Finally, like traditional pension funds, ESOPs are often still capitalized by dollars invested in an extractive stock market. Considering the industries propped up by the market, one can argue that ESOPs invested unintentionally can inadvertently hinder community wealth building. 

Taking It Forward

Today’s “silver tsunami”—the ongoing retirement of Baby Boomer-era entrepreneurs who together own more than 2.3 million businesses employing nearly 25 million people (Walsh 2024)—has sparked renewed interest in ESOPs as a way for owners to ensure their businesses’ long-term viability while also addressing inequality at the root by converting firms into employee-owned businesses. For those interested in setting up an ESOP, several organizations—from ESOP Partners to Employee Ownership Expansion Network (state-specific resources here) to the Employee Ownership Foundation, to the National Center for Employee Ownership—are at your disposal. 

State and local governments can also work to support ESOPs and employee ownership more broadly. This may look like “creating a state employee ownership center, providing tax incentives to help support feasibility studies, providing that employee-owned firms owned and/or controlled by qualifying individuals through an ESOP trust will be eligible for state set-aside programs, [and/or] allowing professional corporations to be owned by ESOPs” (Rosen n.d.). For example, Iowa and Missouri provide a capital gains tax exemption when a firm converts to an ESOP and Iowa also subsidizes ESOP feasibility studies (Walter 2022). Colorado Governor Jared Polis has created the Colorado Employee Ownership Office which convenes service providers and employee owned companies, provides public education, technical assistance grants, and tax credits for employee ownership conversions (Colorado Office of Economic Development & International Trade 2022). New York City; Durham, North Carolina; and Madison, Wisconsin—among others—provide firms with information and technical assistance about employee ownership (Rosen 2022). 

Finally, foundations and corporate donors can also play a role. Whether it looks like making investments in employee ownership conversions, funding research on the impact of employee ownership, and/or seeding public/private partnerships to advance employee ownership, philanthropy can be a critical ally in expanding both the presence and impact of ESOPs in the United States (Abell 2020). 

Additional Resources