Wealth and Income Consequences of ESOPs and Employee Ownership

1998, reprinted 2002. Softcover (6" x 9", 58 pp.). $10 for NCEO members; $15 for nonmembers.

This study, carried out by three leading researchers in the field, shows that employees are significantly better compensated in ESOP companies than are employees in other companies. The study matched up 102 ESOP companies with 499 companies that were comparable in terms of industrial classification and employment size. The median hourly wage in the ESOP companies was 4% to 18% higher than the median hourly wage in the comparison companies, depending on the wage level. The average value of all retirement benefits in ESOP companies was equal to $32,213, with an average value in the comparison companies of about $12,735. Also, employees in ESOP companies had about as much in diversified (non-company stock) assets as employees had in all assets in non-ESOP companies. This study was the most important research on ESOPs published in the 1990s and remains the most authoritative and objective demonstration of how an ESOP can benefit everyone at a company, not just the corporation itself and its owners and managers who install the plan.

Excerpts

From "Wages" (notes and tables omitted)

Given that the value of retirement benefits is significantly higher in ESOP companies than in comparison companies, do employees at ESOP companies typically take lower wages to make purchase of company stock possible? The simple comparison of means summarized in table 16 suggests otherwise. Here, mean and median wages, wages at the 10th and 90th percentiles, and the ratio between wages at the 90th and 10th percentiles are presented for ESOP companies and their matched controls. The results show that ESOP companies pay both higher average as well as higher median wages. The average ESOP company wage of $19.09 is 12% higher than the average control company wage of $17, and the median ESOP company wage of $14.72 is 8% higher than the median control company wage of $13.58. At the 10th percentile, wages in the ESOP companies are 4% higher than in the controls. Chance cannot be ruled out as an explanation for the differences in the mean, median, or 10th percentile wages. At the 90th percentile, ESOP wages are 18% higher than comparison wages, causing the ratio of 90th to 10th percentile wages to be 11% higher in ESOP companies.

How do these preliminary results address the equality of material condition and equality of opportunity questions raised at the beginning of the paper? Compared to their competitors, Washington State ESOP companies typically have higher pay, so employees at the middle of the pay scale are better off in terms of take-home pay working in an ESOP company than in a comparable conventional company. On the other hand, workers at the bottom of the pay scale in ESOP companies do not make much more than comparable workers in competing companies, and there is a greater distance between those at the bottom of the wage scale and those at the top than in conventional companies. There is some greater distance between the employee at the median pay level and the employee at the 90th percentile in an ESOP compared to a conventional company (2.06 versus 1.96), but the difference is not so great as the distance at the 10th percentile.

What happens to these results when we control for other factors, such as industrial sector, unionization, majority ownership, company size, and workplace participation? Table 17 presents the results, for both ESOP and control companies, for the median hourly wage and hourly wages at the 10th and 90th percentiles broken out by one-digit SIC codes. While the differences vary between different SIC codes, in every case but one the median wage for the ESOP companies is higher than for the control companies. The exception is SIC code 5 (Wholesale and Retail Trade), where the ESOP median wage is nearly equal to the control company median wage. The greatest difference between ESOPs and controls is in SIC code 6 (Finance, Insurance, and Real Estate), where the difference is 15%.

From "Supplementary Compensation Such as Stock Options" (tables omitted)

In addition to comparing ESOP and control companies on wages and retirement assets, the survey data we obtained from companies also enables us to make a comparison on stock options, cash bonuses, and the like. Table 24 lists an average dollar value per wage category for various kinds of supplementary pay. Except for the under $6 an hour category, ESOP companies on average pay more per employee than do the control companies (though the comparison is only statistically significant in the $20 to $40 an hour category). As with wages and retirement benefits, the value of these benefits to an individual depends greatly on his or her wage category, with the average payout in the under $6 an hour category for ESOP companies equal to $0, and the average payout in the over $40 an hour category equal to $6,149.

Overall, the average per-person value for the ESOP companies is $1,688 and for the control companies $323 (n.s.). Majority-owned ESOP companies pay out less on average than do minority-owned ESOPs ($485 for 12 majority-owned companies and $2,685 for 21 minority-owned ESOP companies, which is not statistically significant). In addition, more-participatory ESOPs pay out less than do less-participatory ESOP companies ($305 for 18 more-participatory ESOPs and $3,351 for 17 less-participatory ESOP companies, which is not statistically significant). The amount of payout in different one-digit SIC codes varies as well, going from $0 for four companies in SIC code 6 (Finance, Insurance, and Real Estate), up to $5,970 in SIC code 1 (Agriculture, Forestry, Fishing, Mining, and Construction). However, regression analysis shows no statistical significance for SIC code and percentage of participation when they are included in an equation just for the ESOP companies.

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