Report Finds ESOPs Generally Improve Performance

A new review of existing research on ESOPs by Steven Freeman of the University of Pennsylvania finds that the plans generally lead to improved corporate performance, although primarily when combined with high-involvement management systems. Moreover, ESOPs generally are on top of, not in place of, wages or other benefits. Freeman notes that "high profile cases accentuate potential risks through lack of diversification, but most employee-owners are less vulnerable than counterparts." ESOP companies also tend to stay in business longer. ESOPs have little impact on performance in public companies, however, with a number of studies resulting in very mixed results. Public company ESOPs, of course, tend to be dramatically different in structure, financial significance, and cultural relevance than closely held companies.

Freeman finds there is a need for more research on the specific management practices, other than a generally high-involvement work organization, that differentiate one ESOP company from another.

The report was commissioned by the Employee Ownership Foundation, which asked Freeman to provide an unbiased and objective overview of the impact of ESOPs. Copies are available at this link.