Working at an ESOP
Considering a job at an ESOP company? Here are some things you should know.
If you are exploring a job at a company with an ESOP, you probably have a few questions. This page is designed to give you an impartial and outside perspective on what ESOPs are and why you might want to work for one. It’s hosted by the National Center for Employee Ownership, a nonprofit organization founded in 1981, and the leading source of information about employee ownership and ESOPs in the country.
What are ESOPs?
ESOP stands for “employee stock ownership plan.” In legal terms, ESOPs work much like 401(k) plans, and they are governed by many of the same laws and regulations. Unlike 401(k) plans, however, ESOPs can own a significant portion of a company’s shares, or even the entire company. Also unlike a 401(k) plan, the great majority of ESOPs are funded solely by the company, not by employee payroll deductions. Simply put, employees do not pay to become owners through an ESOP. Instead, they acquire shares over time as a part of the company’s employee benefit package.
How many ESOPs exist?
Just over 6,500 companies in the United States have ESOPs. Most of them are in private companies: 1.5 million people participate in ESOPs in private companies in the United States, and together, they own almost $140 billion in company stock. You can see statistics or a map of ESOP companies.
Why do ESOPs exist?
Although the roots of employee ownership in the United States go back to the Founding Fathers, the Peninsula News Group became the first company with an ESOP in 1956. Later, in 1973, Congress passed the law that made ESOPs part of the U.S. tax code in an effort to make US companies more competitive, to generate more retirement assets for working Americans, and to provide a way for business owners to sell their companies to employees. ESOPs have garnered bipartisan support for decades: Ronald Reagan was a prominent supporter, and so is Bernie Sanders. Bipartisan support continues in the current Congress, with members of both parties introducing pro-ESOP legislation in 2021, and a number of states promote employee ownership for local companies.
The impact of ESOPs on employee-owners
The research is clear: people who work for ESOPs have increased job stability, higher incomes, and greater net household wealth. Every company is different, and no business – not even an ESOP company – is immune to the risk of the business world, but the average ESOP company and the average employee at an ESOP company simply have greater economic well-being.
One reason employee-owners do better is that ESOP companies, on average, outperform non-ESOP companies. Another reason is that ESOP companies tend to contribute more to benefit plans than non-ESOP companies. In addition, many ESOP companies invest more than the typical company in employee education and engagement, and they often encourage everyone at the company to be more than “a pair of hands.”
ESOPs are usually designed to give employees a reason to remain employed at the company, so you will not generally benefit directly from the ESOP if you only remain at the company a short time. The longer you stay, the more you are likely to benefit.
All of this has a real-world impact. Employee-owners are simply less likely to choose to leave their jobs. A recent example of that is a 2022 study by the NCEO on ESOP companies in the food and agriculture sector, which found they had quit rates that were less than one-third of the quit rates in non-ESOP companies in same industry.
What to expect in your day-to-day work
An ESOP gives you an ownership stake in the company. If the company does well, then you will share in that success. ESOP companies still operate with boards, executives, and management, all of whom make decisions about the direction and operation of the company.
ESOP companies do not make decisions by consensus or conduct elections on business decisions, but many of them work hard to create a participative style. In addition, the decision makers are obligated to make decisions in the best interest of the shareholders. In the case of an ESOP company, that means making decisions in the interest of employees, rather than other potential owners, such as the stock market or Wall Street investors.
Many ESOP companies’ business strategies involve sharing more financial and operational information than average companies, training people to understand that information, and giving employees the opportunity to problem-solve, innovate, and invest themselves in making the company the best it can be.
Updated February 7, 2023.