NOVEMBER 30, 1985 - VOLUME 6 - NUMBER 17
The ESOP Option
In the last decade, the number of Employee Stock Ownership Plans (ESOPs) has increased dramatically. This relatively recent explosion in the use of the ESOP option has stirred up heated debates in union halls, boardrooms and the media.
Corey Rosen, Katherine Klein and Karen M. Young, in their book, Employee Ownership in America: The Equity Solution, take a closer look at ESOPs and what they mean for workers, managers and corporate executives.
The book narrates the birth and growth of ESOPs over the past three decades-from their rather dubious conception in the mind of a San Francisco investment banker named Louis Kelso, in the 1950s to the passage of the federal tat incentive for ESOPs in 1984. Keslo, who is often noted as the father of the ESOP, wanted to "build support for the capitalist system," by allowing employees to buy into the company they worked for. Although Kelso paid lip service to the notion of the need for more widespread distribution of ownership, his enthusiasm for ESOPs centered on the advantage companies could make of tax breaks and the productivity they could gain under the plans. It is the generous tax incentives offered by the federal government that continue to entice companies to form ESOPs, &cording to Rosen, Klein and Young. The authors examined over 30 companies in their three-year study and found that only 7 percent of the responding consultants said their clients were motivated to set up ESOPs for reasons, other than tax breaks. Fifty percent of the employee-ownership consultants said their clients believed that though the idea of employees owning stock made sense. they "would not [set up ESOPs] if there were no tax or ether financial benefits." And 43 percent of the consultants ;aid their clients were even less enthusiastic about the ESOPs, subscribing to the statement that "If we could "Put the tax or financial benefits of employee ownership without making employees owners, we would prefer that arrangement."
For employers, anxious to take advantage of tax incentives and employee concessions, the ESOP may be the wave of the future. Under the plans, employers donate to a trust a certain amount of the employee's wage in the form of stock-this figure is almost always less than 25 percent of the employee's pay. The employer gains significantly from the plan-stock donations to the trust are exempt from corporate income tax and the money is then reinvested in the firm.
The authors are much more sketchy about what benefits actually accrue to the workers. Of the 37 companies studied, seven were publicly-held companies and were therefore required to pass through full voting rights. None of the others, however, did. Although the idea of owning a piece of their workplace is appealing to some workers, most employees in ESOPs "do not feel that owning stock increases their influence in company decision-making."
It is financially where the workers stand to gain the most, claim the authors. In ten years time, taking the average amount paid in to ESOPs and the average two-year stock change, 8.1 percent and 37.5 percent respectively for companies with ESOPs, an employee who paid in only $16,000 would own more than $37,000 worth of stock. The Lowe's Companies, where employees own 30 percent of the company through an ESOP, have already made 50 workers millionaires. Although stock-owning workers may have a stronger stake in the company, their control over how the stock does usually doesn't extend further than their individual productive capacity.
For Kelso, that is precisely where workers' control over the company should end. "Manager-employees should manage, and non-manager employees should be beneficial owners, but should not interfere with management," Kelso told a House Committee on Small Business.
Although the authors are convinced that worker control can be melded into the ESOP option, many in the labor movement are skeptical. Under ESOPs, even when workers own a majority of the company, it will be management, where larger salaries transfer into more stock, that will have the most control.
Employee Ownership in America is perhaps the most complete study to date on Employee Stock Ownership Plans, offering dozens of case studies of plants that have implemented ESOPs and compiling statistics on worker and management satisfaction and input as well as on company performance. Although in their enthusiasm for ESOPs, objectivity often escapes the authors, their book is important for both proponents and opponents of the ESOP concept.
Stevie Harrell is a freelance writer based in Washington, D.C.