James F. Higgins, Jr.: The Employee Impact of ESOPs

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During my presentation at the XPX Boston Breakfast Series meeting this past Tuesday (9/24/13), we focused primarily on the many financial and non-financial benefits that an ESOP transaction can provide to business owners seeking an alternative to a traditional third party sale of their company.  Dan Guglielmo raised an interesting question regarding the impact of an ESOP on corporate culture and performance.

While an ESOP is not an automatic “performance enhancing substance”, it can have a significantly positive impact on a company’s culture and, ultimately, corporate performance.  This potential benefit may not be at the top of a selling shareholder’s wish list when considering an ESOP, but it is surprising to hear how many business owners seek to perpetuate and increase a company’s success even after they are long gone from the company.

There are generally three specific positive ESOP benefits that impact employees:

  • A Piece of the Pie:  Employees often come to realize that they are no longer simply earning a paycheck from their employer.  A portion of their retirement benefit is now tied to the ongoing success of the company.
  • Involvement: Employees can become more indoctrinated in understanding how the business functions and may result in improved stewardship of corporate resources.
  • Attracting and Retaining Employees:  An ESOP can be a differentiator when it comes to recruiting.  ESOP companies typically contribute more to their employee retirement plans as compared to non-ESOP peers.  ESOP companies also tend to have lower employee turnover.

There is substantial research that supports these benefits (see: http://www.nceo.org/articles/research-employee-ownership-corporate-…) as well as improved corporate performance.  In fact, in a 2000 study by Douglas Kruse and Joseph Blasi of Rutgers University ESOP companies increased sales by about 2.3% to 2.4% per year as compared to companies without ESOPs.

As I suggested up front, the ESOP is not a guarantee for improved performance.  Successful companies leverage the ESOP benefits through continuous education and “weaving” the ESOP into the corporate culture.  When managed effectively, an ESOP can provide a key differentiator for companies.

Originally posted by James F. Higgins, Jr. on October 1, 2013 at 9:40am

Updated: May 5th, 2020

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