Measuring the Impact of Ownership Structure on Resiliency in Crisis

The pandemic and shutdowns provided an opportunity to examine how businesses dealt with a once-in-a-generation economic shock. There is strong reason to believe that employee ownership is a key factor in how businesses and employees fared in this turbulent time. With generous support from the Employee-owned S Corporations of America (ESCA), we set out to design a study that would move beyond anecdotes and provide rigorous evidence.

The most critical and difficult task in this is to create a comparable group of businesses to ESOPs. Every business with a qualified retirement plan, not just ESOPs, is required to file a form with details about the plan with the federal government. The data from these filings is objective and covers all businesses instead of just a sample of them. The data also enables researchers to control for factors such as company industry and size, meaning observed differences between ESOPs and non-ESOPs are not merely outgrowths of ESOPs being more or less prevalent in certain types of companies.

We started here and put significant work into creating a group of conventional businesses that is as fairly matched as possible within a rigorous methodology framework. This work drew upon more than 300,000 plan filings, covering more than 43 million employees.

The parameters of inclusion were: plans that file on a calendar year, privately held, for-profit U.S. employers, plans that identify as S corporation ESOPs, at least 10 active participants up to 25,000, and the largest plan in terms of active participants, if the company has multiple plans.

We measured and compared employee average account balances leading into the pandemic, employer contributions to those assets, and employment changes between 2019 and 2020. Before the pandemic, the average ESOP account balance at an S ESOP was more than double the average account balance at a comparable conventional firm ($132k vs. 64k).

The average yearly employer contribution to the ESOP was 2.6 times that of companies offering a 401(k) ($6,567 vs. $2,507).

94% of total contributions to ESOPs came from the employer, compared to 31% for 401(k) plans.

Nearly 80% of S corporation ESOPs also offer a 401(k) plan, either separate from or combined with the ESOP. The data do not allow for summing each individual account to ascertain with accuracy the total retirement account balance for ESOP participants with an additional plan.

Multivariate regression analysis controlling simultaneously for industry, geography, and size shows that being an ESOP is associated with $67,616 (p =.00) more in retirement assets on average compared to a comparable traditional business.

A separate model controlling simultaneously for industry, geography, and size shows the coefficient for being an ESOP is 6.1 (p=.03) compared to a comparable traditional business. This translates into ESOPs retaining or adding 6 participants on average to their plan. Of course, active participants is not a perfect proxy for employment and our modeling cannot include performance measures like revenue. n