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The Ownership Society and Employee Ownership

By Corey Rosen, NCEO Executive Director

February 2005

There's lots of disagreement about President Bush's vision and plan for an "Ownership Society," but it's hard to find anyone who disagrees with the notion that ownership itself is a powerful idea. The debate is over exactly how people can become owners. Should people, for instance, be encouraged to save for themselves in order to become owners? Or, should Social Security taxes be invested by government in private ownership accounts?

To me, it's quite remarkable that there is all this rhetoric about "ownership" yet barely a whisper about the one proven approach that has created more owners of productive capital in our nation's history than any other: employee ownership.

The Statistics

Back in 1970, only a handful of American workers owned stock in their companies, but by 2002, a General Social Survey study reported that 39% of Americans working for companies that have (or share equity with anyone) equity actually owned stock in their employers and/or held options. This translates into roughly 25 million people, or just under 10% of the U.S. population. Conservatives, however, continue to speak glowingly about the rise in stock ownership by American workers without giving the concept of employee ownership, largely responsible for this shift, any due credit. True, some of these workers don't own very much stock, and some who owned a large amount, such as employees at Enron or United Airlines, wish they hadn't.

Overall, though, employee ownership has been and continues to be a great boon for employees. A Washington state study found that the principal form of employee ownership-ESOPs (employee stock ownership plans)-provide the typical participant with a nest egg of company stock worth nearly three times more than a comparable employee in a non-ESOP company, in terms of retirement plan assets. The employee at the ESOP company also earns 5-12% higher pay, to boot.

Are ESOPs too risky to rely on solely for retirement? You bet. Rutgers University professors Joseph Blasi and Douglas Kruse, however, found in a national study that companies with ESOPs are greatly more likely to have additional diversified retirement plans than comparable non-ESOP companies are to have any kind of retirement plan.

The estimated 10 million employees who hold stock options are faring well too, conventional wisdom to the contrary. Here, Blasi and Kruse found that companies that give options to most or all employees pay about 7% higher than comparable companies. Options are just gravy. A National Center for Employee Ownership survey found that a typical options recipient would realize an average of a few thousand dollars in value per year over a 10-year period, although there is significant variation.

Employee-owned companies can afford this generosity for a simple reason: they tend to perform better. While a few of these studies produce mildly negative (and some neutral) results, dozens of studies demonstrate that employee ownership companies enjoy significant gains. Blasi and Kruse conclude that broadly-based employee ownership increases overall productivity 4%, and that ESOPs have an even greater positive effect, stimulating companies to grow about 2.5% per year faster with their ESOP than would have been expected without an ESOP.

Employees, unsurprisingly, seem to enjoy being owners, too. Over half the companies that issue stock that made the list of "100 Best Companies To Work For" have broad ownership plans.

Tax Friendly

And here's the real kicker: perhaps the most unsung benefit of employee ownership is that it has successfully transferred ownership to tens of millions of American workers without being burdensome to taxpayers. Tax costs for ESOPs range from $1-2 billion, and options don't enjoy much special tax treatment either (stock option exercises are treated as if they were employee income). Companies are able to pay back the tax investments because these employee-owned companies grow faster. The concept of employee ownership is growing not just because of taxes or worker approval, but also because it works.

Most advocates for employee ownership, like myself, are not asking for that much, really. A few laws could be tweaked but, by and large, the existing rules work well. But I tend to think that employee ownership deserves some more publicly voiced respect.

A Society of Owners

In his reelection campaign, President Bush visited Missouri-based Springfield ReManufacturing Company (SRC), an employee-owned company, and delivered a widely covered talk on the economy but said not a word about employee ownership. Our President stood in front of hundreds of SRC employees-hard workers who took their once-fading company, increased employment 900%, stimulated stock growth from 10 cents to over $80 per share, and built a company that is now widely recognized for their effective management style-and didn't utter a word of acknowledgement. (Democrats, it should be noted, weren't any better; John Kerry didn't say much about employee ownership, either.)

The debate will go and on, and I'm happy to let others deal with all of this. I just wish our political leaders and opinion leaders would at least talk about employee ownership within this debate, especially since employee ownership could conceivably help create a true ownership society. Employee ownership, a sound idea, is still largely unknown to or misunderstood by most Americans, even our highly-educated business leaders. Making employee ownership a part of the national discussion on an Ownership Society would help move the idea forward in powerful, productive ways.

And it wouldn't increase the deficit by a penny.

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