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ESOPs prove particularly resilient in the pandemic

The COVID-19 pandemic has wreaked havoc on businesses of all sizes. But regardless of the industry, one group of companies has consistently fared better than almost any other: those owned by their own employees.

More specifically, the outperformers are companies with employee stock ownership plans (ESOPs). Often established to facilitate succession planning in privately held businesses, ESOPs are benefit plans that allow employees to buy stock in their company with no out-of-pocket expense. Instead, the sponsoring company contributes shares — or the cash to purchase them — in employees’ names to a trust fund as part of their compensation package. Employees cash out their shares when they retire or leave the company.

More than 14 million employee-owners currently participate in the nation’s nearly 7,000 ESOP companies, making them the most common form of employee ownership in the U.S.1

New research from Rutgers University and the Employee Ownership Foundation suggests an important reason for their popularity: companies with ESOPs are also among the most resilient around.

For example, companies with ESOPs were more than three times as likely to retain staff as companies without an ESOP in the early months of the pandemic. The Rutgers-led research also found that ESOP companies were less likely to reduce employee hours or pay, while being more likely to maintain employee health and retirement benefits, compared to non-ESOP engaged companies. ESOP companies, on average, also implemented work-from-home and other safety measures more quickly than non-ESOP companies when the pandemic began.

This pandemic is not the first time ESOP companies have weathered crises better than their non-ESOP counterparts. The Rutgers-led research points out that ESOP businesses outperformed non-ESOP businesses during the Great Recession of 2008 as well.

Resilient by design.

The simplest reason for ESOP companies’ stronger-than-average performances has to do with their culture. Sharing company ownership and tying compensation to company performance inspires greater innovation, engagement and commitment among employees, researchers found.

Awarding ownership to lower-level employees not only helps them build wealth, it also creates greater solidarity and a sense of purpose. Consider H-E-B Grocery Company, a Texas-based ESOP chain that donates 5% of pre-tax profits to charity. When major winter storms and power outages hit Texas in February, the local H-E-B responded by allowing shoppers to leave the store with free groceries.

Likewise, business-related decision-making, is more likely to consider both a company’s and its employee-owners’ best interests. For ESOP company leaders, that often means seeking to maintain steady employment levels across all business cycles. In other words, ESOP companies don’t tend to hire hastily when times are good — and they work hard to minimize layoffs when they are not.

The relative stability of businesses with an ESOP during the pandemic and other crises may be attributed to more practical issues as well.

Consider, for example, that when employee-owners retire or leave an ESOP company, they are paid the current market value of their stock. An ESOP company that terminates a significant number of employees at one time could face a jump in employee cash-outs when it can least afford them. It also risks losing valuable skills, not to mention the confidence of remaining employee-owners.

To avoid those scenarios, ESOP companies may prefer to rely on other cost-saving alternatives. The Rutgers-led study found, for example, that businesses with an ESOP were less likely to reduce employee pay than those without during than pandemic. Managers at ESOP companies seemed more willing to reduce their own salaries than to reduce their company’s overall employee headcount.

While funds from the Payroll Protection Program (PPP) certainly helped many ESOP companies cover payroll costs and retirement contributions — including tax-deductible ESOP contributions — for a time, they weren’t necessarily game-changers. In fact, ESOP companies that did not participate in the PPP were still more than three times as likely to retain staff after the emergence of COVID-19 as non-ESOP companies that did.

Looking beyond the pandemic.

ESOPs aren’t for every company, especially smaller or undercapitalized businesses and those whose revenues aren’t predictable or stable. But for companies that value a gradual transition in ownership and wish to reward the people who help the company succeed, ESOPs can provide distinct advantages. Not only can they help attract and retain a talented workforce, they strengthen employee-owners’ confidence in their ability to return to normal once the pandemic is over.

Businesses with an ESOP tend to be resilient in all economic conditions. It’s simply more noticeable in a pandemic.

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Source: 1 EOF_COVID_2020.pdf (employeeownershipfoundation.org)