A tool for building employee wealth is helping companies attract and retain talent.

• In a competitive business climate, companies are exploring ways to gain an advantage. Employee stock ownership plans (ESOPs) could be one such strategy.
• An employee stock ownership plan (ESOP) is a type of benefit that provides workers with a stake in their company through the allocation of stock shares.
• Studies show that businesses providing ESOPs typically have greater customer loyalty, produce superior products, and offer exceptional service.

In a competitive business climate, companies are exploring ways to gain an advantage. Employee stock ownership plans (ESOPs) could be one such strategy.

According to Jim Bonham, president and CEO of The ESOP Association, there is a growing interest in employee ownership among prospective employees, particularly younger workers, as well as government and political leaders.

An ESOP is a benefit plan that enables employees to own a portion of their company through stock shares. Such plans offer tax benefits to both companies and participants, and can help align worker and employer interests through financial strategy.

Across economies, the idea of employee ownership as a solution to wealth and income disparities is gaining traction, according to Bonham.

In 2020, the National Center for Employee Ownership reported that 225 new ESOPs were established, resulting in a total of approximately 6,467 ESOPs in the US, with total assets of over $1.6 trillion and covering nearly 14 million participants.

Better company loyalty

Bonham stated that companies that offer ESOPs have higher customer loyalty due to the belief that ESOPs produce higher quality products and provide better service. He emphasized that the company's reputation is tied to the employees' understanding of the importance of customer service and quality to their bottom line.

ESOP companies emphasize "employee owned" in their marketing and branding to convey values of high quality, good citizenship, and customer service, according to Bonham.

Offering ESOPs can also make companies more attractive from a hiring perspective.

ESOPs are renowned in their communities for being top-notch employers, with benefits and ownership interest that attract prospective employees. They retain their employees at higher rates than traditional firms, resulting in lower operating costs due to lower turnover.

Tax savings

Tax incentives granted by Congress have increased the popularity of ESOPs as a tax-efficient tool for businesses, providing tax benefits to employees.

In recent years, ESOPs have become a popular compensation strategy among companies, especially start-ups, to attract and retain top talent, boost employee engagement, and promote long-term growth, as stated by Cheryl Collins, vice president of people at food products provider Bob's Red Mill, a 100% employee-owned company.

An ESOP can be a successful retirement savings vehicle for highly diversified businesses, as it operates without corporate taxes. Employees benefit from sharing in the value they create without contributing cash, resulting in higher retirement savings and wealth. Business owners can also benefit from the 1042 tax rollover and defer capital gains when selling to their employees through an ESOP.

Employees as dedicated shareholders

An ESOP can make employees feel more integral to a company's success and contribute to its health and longevity, leading to job growth and profitability, according to Collins.

"All employees share in the value of our hard work and success, as well as the influence we have in company decision-making, which positively impacts morale, engagement, and creates a connected workplace culture where we feel valued and connected to the company's success," she stated.

Bob's ESOP has helped reduce job turnover, even during the great resignation in 2020 and 2021, as employee partners are typically loyal due to their vested interest in the brand as a whole.

The company's growth over the past decade is not solely due to having an ESOP, but being employee-owned has contributed to healthy growth. Since becoming an employee-owned company in 2010, Bob's Red Mill has grown from 209 employees to over 700 employee partners.

The company's profit-sharing program, 401(k) and ESOP, provide employees with superior retirement savings and job security, while also reducing wealth inequality, she stated.

ESOP challenges

Business owners may encounter difficulties when introducing an ESOP if they do not seek the guidance of knowledgeable professionals who are aware of the regulatory factors that may be taken into account during a review of the company's valuation, as advised by Bonham.

The biggest challenge for newer ESOPs is ensuring the long-term sustainability of the business as aging employees begin their retirement cycle and the company must repurchase their ownership interest. This requires careful planning and cash flow management to meet the obligation. According to Bonham, there are effective models and strategies to make any company sustainable indefinitely, but the management team must be aware and prepared.

The Internal Revenue Service has been working on simplifying regulatory compliance issues related to ESOPs, with the aim of encouraging more of them. As a result, we can expect an increase in ESOP valuations as the regulatory complexities become less of a hindrance, according to Collins.

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