`

ESOP Association’s Position on President’s Panel on Federal Tax
Reform Recommendation on Retirement Savings

Problem:  On pages 61, 93, 108, 115, and 157 of the President’s Panel on Federal Tax Reform Recommendations to the President [the Panel], now under review by the Department of Treasury, the Panel recommends that all current defined contribution plans be eliminated and that a “Save at Work” deferred compensation plan be the only plan that private sector employers are permitted to offer to their employees.

Since 1974, Federal statute has sanctioned employee stock ownership plans, or ESOPS, as one permissible type of defined contribution plans.  [The first plan similar to an ESOP was sanctioned in 1949 by an IRS private letter ruling.].

The Panel’s recommendation, if enacted into law, would eliminate ESOPs.

Request:  The ESOP Association, a 501(c)(6) entity, with over 2400 members nationwide, requests that the Department of Treasury reject the Panel’s recommendation as it impacts ESOPs.

Commentary:  Congress, under both Democratic and Republican leadership, as evidenced by the enactment of 24 laws since 1974 promoting ESOP creation and operation, and Administrations, both Republican and Democratic, have consistently supported the use of ESOPs as a means to broaden ownership in the United States.   

During that time, the Congress, and the Administration, primarily through the Department of Treasury’s Office of Tax Policy, and the Department of Labor’s Employee Benefits and Security Administration, and in numerous hearings by the appropriate committees of Congress, have examined the operation of ESOPs, and their impact not only on the retirement security of employees participating in ESOPs, but also whether ESOPs do establish broadened ownership and high performing companies.  In some instances, Congressional committees and/or Administrations have recommended changes in ESOP laws that were perceived as “cutbacks”.  In some instances proposed cutbacks in ESOP law, particularly tax incentives to create and operate ESOPs, were enacted into law, and in some instances the cutbacks were rejected by Congress.

But at no time has anyone ever suggested totally eliminating ESOP as a tool to broaden ownership in the United States.

In fact, the last time an Administration undertook to reform the Federal tax laws, President Reagan and his Treasury Department officials worked with Congress to expand the laws that promoted employee ownership through ESOPs.

Making the Case for Continuation of ESOPs:  Attached are brief synopsizes of the research and demographics of ESOPs that demonstrate that they are crucial to thousands of U.S. companies, of which 98% are small to mid-sized private companies, and to millions of employees.  The research also demonstrates that in the overwhelming, vast majority of instances, an ESOP company creates significant wealth for employees, and outperforms its competitors.  This statement is made recognizing that having an ESOP in a free enterprise economy does not guarantee corporate success.


Employee Ownership and Corporate Performance

  1. In 2005, the Employee Ownership Foundation, conducting its 14th Annual Economic Performance Survey (EPS), found that a very high percentage of companies, 87.5%, declared that creating employee ownership through an ESOP (employee stockownership plan) was “a good decision that has helped the company.”  In addition, the EPS asked companies to indicate their performance in 2004, relative to 2003.  Approximately 74% of respondents indicated a better performance in 2004 than 2003, 9% indicated a nearly identical performance, and 17% indicated a worse performance. Approximately 84% indicated that revenue increased while 16% indicated revenue did not increase.  In terms of profitability, 74% indicated that profitability did increase and 26% indicated that profitability did not increase in 2004.  This survey was conducted in the summer of 2005 among corporate members of The ESOP Association. 
  2. The most comprehensive and significant study to date of ESOP performance in closely held companies was conducted by Dr. Joseph R. Blasi and Dr. Douglas L. Kruse, professors at the School of Management and Labor Relations at Rutgers University, and funded in part by the Employee Ownership Foundation.  The study, which paired 1,100 ESOP companies with 1,100 comparable non-ESOP companies and followed the businesses for over a decade, reported overwhelmingly positive and remarkable results indicating that ESOPs appear to increase sales, employment, and sales/employee by about 2.3% to 2.4% over what would have been anticipated, absent an ESOP.  In addition, Drs. Blasi and Kruse examined whether ESOP companies stayed in business longer than non-ESOP companies and found that 77.9% of the ESOP companies followed as part of the survey survived as compared to 62.3% of the comparable non-ESOP companies.  According to Drs. Blasi and Kruse, ESOP companies are also more likely to continue operating as independent companies over the course of several years.  Also, it is substantially more probable that ESOP companies have other retirement-oriented benefit plans than comparable non-ESOP companies, such as defined benefit plans, 401(k) plans, and profit sharing plans.
  3. Research done by the Washington State Department of Community, Trade and Economic Development of over 100 Washington not publicly-traded ESOP companies compared to 500 not publicly-traded non-ESOP companies showed that the ESOP companies paid better benefits, had twice the retirement income for employees, and paid higher wages than their non-ESOP counterparts. Wealth and Income Consequences of Employee Ownership: A Comparative Study from Washington State, Kardas,  Peter A., Scharf, Adria L., Keogh, Jim, November, 1998.
  4. Research conducted by Professor Hamid Mehran, while he served on the faculty of the J.L. Kellogg Graduate School of Management, Northwestern University, of nearly 400 publicly traded companies with significant ESOPs both before and after the adoption of the ESOP, compared to non-ESOP companies in similar lines of businesses, showed that the rate of return for the ESOP companies was 2.7% higher, 60% of the ESOP companies experienced share price increases upon announcement of the ESOP program, and 82% indicated that the ESOP had a positive impact on business results.
  5. In 1995, Douglas Kruse of Rutgers University examined several different studies between ESOPs and productivity growth.  Kruse found through an analysis of all studies that "positive and significant coefficients [are found] much more often than would be expected if there were no true relation between ESOPs and productivity."  Kruse concludes that "the average estimated productivity difference between ESOP and non-ESOP firms is 5.3%, while the average estimated pre/post-adoption difference is 4.4% and the post-adoption growth rate is 0.6% higher in ESOP firms.  Kruse cites two studies as part of his research: Kumbhakar and Dunbar's 1993 study of 123 public firms and Mitchell's 1990 study of 495 U.S. business units in public firms.  Both reports found significant positive effects of greater productivity and profitability in the first few years after a company adopted an ESOP.
  6. In 1995, the U.S. Department of Labor released a study entitled "The Financial and Non-Financial Returns to Innovative Workplace Practices: A Critical Review."  This study found that companies that seek employee participation, give employees company stock, and train employees, can positively affect American corporations' bottom lines.  In addition, the report cited three studies that analyzed "the market reaction to announcements of ESOPs which found significant positive returns to firms which implemented ESOPs as part of a broader employee benefit or wage concession plan."  The three studies are: Chang's 1990 "Employee Stock Ownership Plans and Shareholder Wealth: An Empirical Investigation"; Dhillon and Ramirez' 1994 "Employee Stock Ownership and Corporate Control"; and Gordon and Pound's 1990 "ESOPs and Corporate Control." citation at (202) 293-2971 or E-mail: esop@esopassocation.org.

For additional information about ESOP or The ESOP Association, visit the website at www.esopassociation.org, call 1-866-366-3832, or email esop@esopassociation.org.


ESOP Facts and Figures

  • There are approximately 11,000 ESOPs in place in the U.S., covering 10 million employees (10% of the private sector workforce).
  • These employees draw in excess of 3% of their total compensation from ESOP contributions.
  • The growth of ESOP formation has been influenced by federal legislation.  While the rapid increase in new ESOPs in the late 1980s subsided after Congress removed certain tax incentives in 1989, the overall number has remained steady with new plans replacing terminated ESOPs.  The approximate chronology is as follows:

1974 – 200 ESOP companies
1981 – 1,500
1984 – 2,500
1987 – 5,000
1990 – 10,000
1996 – 10,000
1997 – 10,000
2000 – 11,500
2002 – 11,500
2003 – 11,500

  • About 500 ESOPs - 8% - are in publicly traded companies.  However, these companies employ just under 50% of the nation's 8 million employee owners.
  • An estimated 6,000 of the 10,000 companies have ESOPs that are large enough to be a major factor in the corporation's strategy and culture.
  • Approximately 3,000 ESOP companies are majority-owned by the ESOP.
  • Approximately 1,500 are 100% owned by the ESOP.
  • About 3% of ESOP companies are unionized.
  • While ESOPs are found in all industries, more than 25% of them are in the manufacturing sector.
  • At least 75% of ESOP companies are or were leveraged, meaning they used borrowed funds to acquire the employer securities held by the ESOP trustee.
  • A majority of ESOP companies have other retirement plans, such as defined benefit pension plans or 401(k) plans, to supplement their ESOP.
  • Of the 11,500 employee-owned companies nationwide, fewer than 3% were financially distressed when they established their ESOP.
  • Total assets owned by U.S. ESOPs is estimated to be $600 billion at the end of 2004.

For additional information about ESOPs or The ESOP Association, please visit the website at www.esopassociation.org, call 1-866-366-3832, or e-mail esop@esopassociation.org