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The State of Broad-Based Employee Ownership Plans 2015

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 early 2015 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 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 generally and private company equity compensation in particular; 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.

Publication Details

Format: Perfect-bound book, 34 pages
Publication date: February 2015
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
Private Company Equity Trends
Corporate Performance Data: Does It Matter Who Gets Equity?
Stock Options and Corporate Outcomes in Great Place to Work Applicants
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 "Growth of ESOPs and Equivalent Plans" (tables omitted)

ESOP formation grew steadily until the early 1980s, when many public companies set up ESOPs. At first, that was to take advantage of "Payroll Tax Credit ESOPs," plans operating under a law that allowed a 1% tax credit for contributions to an ESOP in public companies. Companies could contribute shares, so many set up these plans as, in essence, a way to sell shares the government tax credit paid for. The hope was that would encourage companies to set up larger plans, but an NCEO analysis showed that did not happen. The tax break was reduced to 0.5% in 1984 and eliminated in 1986. Also in 1986, a new law allowed banks to make loans to ESOPs and deduct 50% of the interest income. The resulting lower-cost loans were used by many public companies to help fund their contributions to 401(k) plans or, less often, to stockpile shares as a takeover defense (a strategy of dubious value). In 1992, however, accounting rules changed in a way that was less favorable for ESOPs, and many public companies moved their contributions of stock from their ESOPs to 401(k) plans and began terminating their ESOPs. Formal plan designations changed, but not substance. Employees got pretty much the same share contribution, just in a different plan. The takeover mania of the late 1980s also faded, and in 1996, the interest exclusion was eliminated. Some people looking at the trends in ESOPs conclude from this that ESOPs lost popularity. They did in public companies, but not private companies. Since the decline in ESOPs in public companies, whose plans had generally been very small to begin with, was more form than substance, the change in numbers is deceptive.

Meanwhile, ESOPs in closely held companies were growing, both in numbers and size. The number of plans has slightly declined in recent years, but the number of participants has gotten much larger. We at the NCEO believe that is due to three factors:
  • ESOP companies grow employment about 2.5% per year faster than they would have absent an ESOP.
  • ESOPs are being set up in larger companies than in the past.
  • ESOPs are doing a lot of acquisitions, something that did not start until the early 2000s.

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 3 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.

From "ESOPs and Executive Compensation" (notes and tables omitted)

n 2014, the NCEO conducted a survey of 374 closely held ESOP companies, asking for data on executive compensation at six different officer levels. The companies were broadly representative of ESOP companies other than in the percentage that are S corporations (about half of all ESOP companies are S corporations, but 83% of survey respondents were). Table 11 provides key demographic data for survey respondents, and tables 12 to 14 provide a brief summary of the survey results.

From "International Developments in Broad-Based Plans"

Ireland, the UK, Australia, and New Zealand all have multiple laws to encourage widespread employee ownership, but Canada does not. In the UK, since 2011, leaders of all three political parties have made creating a "John Lewis" economy a major political focus, one that has received substantial press attention. John Lewis is an iconic UK retailer with about 70,000 employees that is entirely owned through a trust set up to hold shares permanently in the name of employees. The employees never actually get the shares, but do get payments of earnings from them. The company has been a stellar performer and its customer service is legendary. There already are programs to encourage broad employee ownership in the UK, most notably the Save as You Earn program, a stock purchase plan that provides employees with tax savings on shares they can buy at a discount provided certain rules are met, and the Share Incentive Plan, which provides employers and employees with tax incentives for corporate donations of shares or, more commonly, share matches to employee deferrals.

In 2014, legislation was passed to provide significant tax incentives for owners of non-listed companies to sell to an employee benefit trust, an arrangement similar to a U.S. ESOP trust. As with U.S. ESOPs, sellers get capital gains tax relief by selling to the trust, and companies can deduct the costs of funding the plan. The law has already prompted a number of conversions.

The Cameron government has made a major push for "mutualisation," the spin-off of government services to employee, community, or jointly owned companies. Employees have the right to offer to bid for these services and may be given preferential treatment. A few such transactions have taken place since 2011.