Heard of ESOP? If not, you’re not alone.
Kevin McPhillips, executive director of the Pennsylvania Center for Employee Ownership (PACEO), says virtually no one knows about them, although approximately 5,500 companies have Employee Stock Ownership Plans (ESOP) in the U.S., with 309 in PA.
ESOP, a type of retirement plan, was enacted by Congress in 1974 as part of a larger employee benefit program law. Congress was trying to deal with the government’s future obligations to Social Security and the widening wage gap.
So how do they work?
“An owner can sell some or all of their company to their employees. Employees pay nothing. The business takes on a loan from a traditional source and pays it off over time,” he explains.
The firm never has to pay either federal or Pennsylvania state taxes again on the profits of the portion of the business owned by employees. One hundred percent employee owned means zero taxes. The tax savings pay off the mortgage. Once the loan is retired there’s as much as an additional 25 or 30 percent cash. There are a number of different kinds of ESOPs.
The benefits of the program are extraordinary. McPhillips shares some statistics. The 24- to 36-year-old employee population has 30 percent higher wages. Employee owned companies are more productive by eight to 12 percent which more than doubles their profitability over ten years and makes them less likely to lay off workers. 401K plans don’t go away either; 98 percent also have a 401K plan in which employees can diversity if they so choose. And the kicker? Employee owners have two and a half times as much retirement savings as non-owners.
What’s also important is that employee-owned businesses stay in Pennsylvania.
“They don’t get sucked up by off-shore interests or private equity groups, stripped down and moved out of the state,” says McPhillips, leaving behind an involuntarily separated workforce.
Not left out of the equation are the business owners themselves. When they sell the company to their employees, owners receive full fair market value, exactly the same number they would receive if selling to any other entity. An independent assessment is completed by a third party valuation company.
Raising awareness of ESOPs is the mission of PACEO, a volunteer collective of current and former CEOs experienced in the various forms of employee ownership, foundations and universities such as Chatham and Rutgers and the W.K. Kellogg Foundation, and experts in the industry including attorneys, financial advisors and trustee companies.
The center which began in 2016 targets multiple populations in their quest to publicize and educate companies about ESOPs. To do so PACEO participates in educational panel programs for businesses and business related organizations such as chambers, economic development groups and trade associations. They also work one-on-one with government and recently met for a second time with Governor Wolf and the Secretary for Community and Economic Development to discuss ways the state could raise awareness. Their public relations campaigns are broad based using multiple media and have or will include the Philadelphia, Pittsburgh, Harrisburg, Lancaster and Erie areas.
Their efforts are paying off as evidence, while anecdotal, points to a robust level of investigation by PA companies, much more so than anywhere else in the country. Hard data for ESOP conversions lag by two years.
PACEO’s model differs from the four other state-level organizations that exist across the US. PACEO was set up to be very specific and very different than the others says McPhillips. “We only do one thing which is raise awareness. Our model is really a marketing organization. We don’t charge anything for our services, we don’t sell anything. The only thing we do is teach.”
By positioning themselves this way they don’t compete with service providers and professional organizations. “Instead we’ve brought them under our roof and made them a part of our organization. We simply teach you about it and when you’re ready we’ll hand you off to a large list of professionals, all of whom have been vetted to meet certain standards. We don’t recommend any particular organization.”
Job seekers can find an ESOP in just about any industry sector and any size company with one exception: professional partnership organizations. Attorney organizations are excluded for example. Employee owned companies also routinely make up more than half of Fortune Magazine's "100 Best Companies to Work for in America". This means that no matter your skill set there is potentially an ESOP for you. The largest number are found within manufacturing followed by professional, scientific and technical services.
“We’re seeing more tech companies investigating and completing ESOPs really for the purpose of retaining employees. A lot of PA engineering and design firms are employee owned. They’re trying to hold their talent particularly after training someone,” says McPhillips.
The National Center for Employee Ownership (NCEO) estimates that roughly 14 million US employees (almost 400,000 in PA) own stock through an ESOP. By area of the country the Midwest is home to the largest percentage of companies, 32 percent, with the Northeast at 16 percent.
While the benefits are striking ESOPs are not magic wands in which you become a millionaire on day one with the company. Employees can and have done so through their ESOP, but it happens over time. One example involves twin sisters, one of whom worked for a grocery company that became an ESOP and the other at a law firm. After 22 years the twin at the law firm had saved $70,000 through a 401K. The other sister stocked shelves, never participated in her 401K, and had just over one million in her ESOP account.
Another example closer to home involves a pipe company in Selinsgrove. The owners were aging and wanted to sell, but knew the company would be moved out of the area. Instead they sold to their employees in the form of an ESOP. Fifteen years later employees now number over 200 and the original 40 have enough to retire, some with seven figures. These are warehouse workers, drivers, customer service people, installers and salesmen.
Need more? A 2017 NCEO analysis, the first quantitative research conducted, sampled employee-owner workers aged 28 to 34 and compared the data to Bureau of Labor Statistics survey data of younger workers. Some highlights of the research show employee-owners have 92 percent higher median household wealth, 33 percent higher wage income and 53 percent longer median job tenure. They are also more likely to have access to a broader range of benefits such as parental leave and flexible schedules. While many factors contribute to a worker’s financial stability and well-being these facts demonstrate how working for an employee owned company can bolster financial fortunes.
Working at an ESOP company is not a free pass. Expectations are that everyone works hard and human resource rules still apply. “People want to profit from the growth and the success of the business so you have to have that mindset,” according to McPhillips.
If you’re ready to learn which PA companies are employee owned, head over to PACEO’s website and their interactive map where you can zero in to a radius around a zip code or out to the state. In addition McPhillips offers they will share any information they can. You can ask questions by filling out the form.
Right now there are 11 ESOP companies in the Lancaster area, 12 with Astro Machine Works which is too new to be included as of yet.
You’re going to work hard throughout your career no matter where you’re employed. Why not seek out an employee owned company and help create as well as participate in its success. ESOPs can provide an additional pathway to your financial security.