Employee Ownership: Benefits and Impacts on Business

Is Employee Ownership Good for Business? Presented by Corey Rosen National Center for Employee Ownership 1736 Franklin Street, 8th Floor Oakland, CA 94612 510-208-1300 crosen@nceo.org

What Do We Mean By Working? • Is It Good for Employees? • Is It Good for Companies? • Is It Good for Owners? • Is It Good for Society?

ESOPs • Stands for employee stock ownership plan, a specific statutory plan under U.S. law • Employees do not buy stock • Companies set up a trust to hold shares for employees and can make tax-deductible contributions to the trust to purchase shares or contribute shares directly • Often used to buy out an owner of a closely held company • Stock allocated at least to all full-time employees based on pay or a more level formula • Employees get shares when they leave and can sell them back to the company

ESOP Numbers • About 11,000 plans covering about 12 million employees • About one-third of ESOPs own 100% of the company (100% ESOP companies pay no income tax) • ESOPs hold about $890 billion in assets • 97% of ESOPs are in closely held companies ranging from as small as 10-20 employees to as large as 150,000.

Good for Employees? • In ESOP companies, employees have almost three times the retirement assets as comparable non-ESOP employees. • ESOP companies are somewhat more likely to have a secondary retirement plan as comparable companies are to have any retirement plans. • Salaries are somewhat higher. A Better Nest Egg

Good for Companies? • ESOP companies grow 2.5%/yr faster than would have been expected without a plan in sales, employment, and productivity. • ESOPs in public companies have a 5.5% greater return on assets than comparable companies and 8% higher Tobins Q (a measure of stock value relative to asset value).

Individual Stock Awards • Stock options • Restricted stock • Phantom stock and stock appreciation rights • Right to buy stock at a price fixed at grant for a defined number of years into the future • Grants of shares subject to vesting conditions • Cash payment s for value of shares or increases in value

Equity Awards Data • About 9 million employees receive some form of individual equitya ward in broad-based plans (50% or more full-time employees eligible). • Plans deliver a mean annual value per employee of about $1,000 to $2,000 per year. • Vast majority of covered employees in public companies.

Stock Awards and Performance • There is a 0.4 percentage point increase in industry-adjusted ROA for every $1,000 increase value of per-employee stock award in companies with broad-based plans, but in companies where just executives get awards, the effect is negative. • In high-performing industries, turnover is 20% lower than in companies with broad-based plans. • Employees get as much or better play plus their equity awards. • Overall impact is significant, but much lower than ESOPs.

Employee Stock Purchase Plans • Allow employees to buy shares at a discount • Employees put aside after-tax cash on a voluntary basis over a 3 to 12-month period and can typically purchase shares at a discount of 5% to 15% of the price at purchase or the price at the beginning of the offering period, if lower. • No tax incentives for company • About 11 million participants, almost all in public companies. • About one-third of eligible employees choose to participate.

ESPPs and Performance • No significant impact of company performance, although turnover slightly lower • Potential significant annual income addition for participating employees, but few employees put enough into the plans (if anything) to realize that

Good for Society? • ESOPs and broad-based equity have minimal tax costs and may generate positive tax flow over time. • Real wages have been almost stagnant for 40 years, and retirement savings are inadequate, but capital returns have grown substantially. • Employee owned firms generate more jobs and are less likely to close.

What Makes Plans Work • Not enough just to have a plan • Companies need a “culture of ownership” in which employees have structured, regular opportunities for input into decisions about their work and receive regular updates on company and group performance. • Companies that combine both do far better than companies with just either one. The largest study ever undertaken of these issues showed that companies with this model of sharing equity results and high involvement have dramatically lower turnover, significantly higher returns on investment, and much higher employee scores on Great Place to Work Index.

But It’s Not All Good News • Some companies use employee ownership badly • Some companies just don’t perform well. • Some companies abuse employee ownership

Lessons from U.S. Experience • ESOPs have the greatest impact on corporate performance and employee incomes. Equity awards have a less significant, if still positive impact. Stock purchase plans have little impact. • In the U.S. and elsewhere, plans that allow employees to hold shares individually tend to deteriorate over time • Plans that rely on employee purchases, even with large incentives, have minimal impact, especially on lowest-paid workers. • Corporate culture is key, and that requires both a financially significant plan and employee involvement, but also participation by most or all employees.

Taxes and Rules Matter • U.S. ESOPs have been as successful as they have been in creating widespread substantial employee ownerships because of tax benefits to companies and owners. Closely held companies are often overlooked target audience. • Plan rules need to be inclusive, have provisions to protect employee rights while not deterring employers, and hold shares for at least some period of years to generate longer-term commitment.

So Why Is It Not More Common? • Still not as well known as it should be • Seems complex to many people • What may be good for the company overall may not be good for top leadership, especially if they are competing for limited equity. • Hard, if worth it, to do really well • Cult of the CEO • Employee involvement seems “squishy’ as path to corporate success • Culture is more competitive than cooperative

Resources • For a summary of corporate performance effects, go to http://www.nceo.org/main/article.php/id/3/. • For a description of how plans work in the U.S. and their prevalence, go to http://www.nceo.org/main/article.php/id/52/ • Equity: Why Employee Ownership Is Good for America (Rosen, Case and, Staubus, Harvard Business School Press)

Questions ? Corey Rosen National Center for Employee Ownership 1736 Franklin Street, 8th Floor Oakland, CA 94612 510-208-1300 crosen@nceo.org

Employee Ownership: Benefits and Impacts on Business