New Study Shows ESOPs Increase Total Worker Compensation in Public Companies Significantly, But Not at Shareholder Expense

One of the most common arguments against ESOPs is that they substitute for other compensation, replacing cash or diversified retirement investments with risky stock. Existing data on closely held companies decisively refute that point, but, until now, there have never been data on ESOPs in public companies, which include perhaps half or more of all ESOP participants.

In an new study, E. Han Kim of the University of Michigan and Page Ouiment of the University of North Carolina ("Employee Capitalism or Corporate Socialism: Broad-Based Employee Stock Ownership," October 28, 2008) find that ESOPs owning less than 5% of company shares have a small (0.8%), but positive effect on total compensation, while in companies where the ESOP owns more than 5%, total compensation is 5.2% higher. The more leverage associated with the ESOP, the lower the increase in employee compensation, perhaps because companies exercise restraint on total compensation in the face of greater debt. By contrast, the sub-sample of companies where the ESOP was established in conjunction with declining sales resulted in lower total compensation (2.8% for small ESOPs and 6.3% for large ESOPs).

The effect on value (measured by a standard measurement, Tobin's Q, a ratio of the company's stock value to its book equity value) followed a similar pattern. Overall, ESOPs led to an 8.12% increase in company valuation relative to the industry median. Companies with ESOPs with less than 5% ownership showed a valuation increase of 16% relative to the industry median; companies with larger ESOPs showed neither an increase nor a decrease.