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The State of Broad-Based Employee Ownership Plans 2016

An NCEO Issue Brief

(Print Version)

by Corey Rosen

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Written by NCEO founder Corey Rosen, this issue brief discusses as of mid-2016 the extent and growth of employee ownership; survey data on ESOPs and corporate governance as well as ESOPs and executive compensation; research on the effect of ESOPs on corporate performance; the 2012 shared capitalism study of Great Place to Work applicants; data on employee ownership and employee financial well-being; the NCEO's analysis of data on ESOPs and default rates; trends in broad-based equity compensation plans; equity compensation and corporate performance; the impact of ESOPs and other broad-based plans on unemployment; legislative and regulatory issues for employee ownership; and international developments in broad-based plans.

Publication Details

Format: Perfect-bound book, 34 pages
Dimensions: 8.5 x 11 inches
Publication date: August 2016
Status: In stock


Growth of ESOPs and Equivalent Plans
ESOPs and Corporate Governance
ESOPs and Executive Compensation
The Effect of ESOPs on Corporate Performance
The 2012 Shared Capitalism Study of Great Place to Work Applicants
Employee Ownership and Employee Financial Well-Being
ESOPs and Default Rates
Broad-Based Equity Plans
Corporate Performance Data: Does It Matter Who Gets Equity?
The Impact of Participation in ESOPs or Other Broad-Based Equity Plans on Unemployment
Legislative and Regulatory Issues for Employee Ownership Plans
International Developments in Broad-Based Plans
About the Author


From "Overview"

Employee ownership has increasingly been in the news in 2016, with considerable attention paid to the grant of equity potentially worth six figures each for employees of Chobani. While that story generated a great deal of national coverage, the company is just one of thousands U.S. companies doing this. The idea of sharing ownership may be striking a chord with a public eager to find practical, bipartisan solutions to issues of economic inequality. As we will explore later, data from Public Policy Polling shows strong across-the-board support for employee ownership. The Republican Party platform endorsed the idea, as has Hillary Clinton.

This issue brief first reviews the recent data on the prevalence and impact of ESOPs and similar plans (stock bonus and profit sharing plans invested primarily in company stock), followed by the same analysis for ESPPs and broad-based equity grants. It does not focus on 401(k) plans because employer stock in these plans is usually just one of many investment options, not a corporate strategy or philosophy. This issue brief is not a comprehensive review of every survey or study but rather of those that present the most complete, objective, and well-documented pictures.

From "Growth of ESOPs and Equivalent Plans" (tables omitted)

It is not clear why the number of new plans has not resumed its growth (it could be lingering effects of the recession or baby boomers deciding to retire later), but we believe the number of plans may soon accelerate as baby boomers look to retire and choose ESOPs as a logical and tax-favored exit vehicle (at least twice as many companies will be for sale in the next decade as the last). Table 2 presents a breakdown of ESOPs in terms of plans, participants (this term includes both current employees and former employees still in the plan awaiting payout), and assets by both company size and public/private status. Because there is a lag time in when data become available, 2013 data are the latest usable numbers as of mid-2016.

The ESOP company acquisition phenomenon deserves special note. Until the early 2000s, it was rare for ESOP companies to buy other companies. But as ESOPs matured and retired their acquisition debt, and then usually became 100% ESOP-owned S corporations paying no tax, they had substantial cash reserves to buy other companies. Sellers often prefer to sell to an ESOP company because they think it will be better for their employees. We estimate that there are as many, and perhaps more, companies becoming ESOPs via acquisition as there are companies setting up new ESOPs. These acquired companies, however, do not show up as new ESOPs.

Standalone ESOPs are ESOPs not integrated with a 401(k) plan. Some companies combine an ESOP with a 401(k) plan into a single filing, called a "KSOP." In these plans, the non-employer stock generally comprises a much larger portion of total assets than employer stock. Almost all the 544 public companies with ESOPs have KSOPs. Typically, employer stock contributed to the ESOP portion of the plan constitutes the 401(k) match.

In addition, there are over 2,500 "ESOP-like" plans. These are almost always profit sharing plans largely invested in company stock. Most of these companies are small, typically under 30 employees. While the rules for the two plans are similar, and employees get very comparable benefits, profit sharing plans give up some of the special tax benefits of ESOPs in return for somewhat more flexible rules about allocation.

From "ESOPs and Corporate Governance" (notes and tables omitted)

In 2015-16 the NCEO conducted a detailed survey on how ESOP companies approach key corporate governance issues, including board composition, director terms, director and trustee compensation, the characteristics of the ESOP trustee, and the role of ESOP participants in governance. The survey is the largest ever conducted on ESOP corporate governance practices, with 309 valid responses from a diverse sample of ESOP companies. The results show differences between the governance practices at companies based on size, industry, region, percentage of ESOP ownership, and other demographic categories.

Table 6 provides statistics on the number of directors for ESOP companies based on size. "Small" is defined as revenues of $50 million or less; "large" is defined as greater than that. On average, ESOP companies have between five and six directors, with small ESOP companies averaging 4.9 directors and large ESOP companies 6.2 directors.

The trend toward adding outside directors has been striking. The survey found that 69% of ESOP companies have at least one independent director on the board. Size greatly influenced whether the board includes independent directors. Thirty-four percent of small ESOP companies have no independent directors on the board, whereas only 18% of large ESOP companies have no independent directors. These numbers are up from 46% and 29% just four years ago, and are far higher than what would have been found a decade ago. Employees vote for the board in 15% of the companies, a somewhat higher percentage than has been found in prior surveys.

As table 7 shows, the percentage of ESOP ownership has an inconsistent relationship to having outside directors.