While ESOPs can provide softer benefits to employee owners—such as greater involvement in decision making—at their core, they are a means for putting money into employees’ pockets. Typically, that money is intended for use in retirement. But ESOPs also tend to provide financial benefits that employee owners may realize much sooner.
For example, an ESOP requires no out-of-pocket contribution by employees—so they still have the same funds available to invest elsewhere, such as a 401(k). And many ESOPs provide that option: The 2015 ESOP Survey of members of The ESOP Association found that 93.6 percent of respondents offer a 401(k) in addition to their ESOP.
In general, research has found, ESOPs are more likely to provide two retirement benefits than most firms are to provide only one.
And it doesn’t stop there: The ESOP Survey found that 2.6 percent of respondents also offer employees a defined benefit pension. That means employee owners in these companies get two retirement plans, and neither plan requires them to invest a single dime from their own pockets.
Some critics assume that all this generosity must come at a price—namely that companies pay for their ESOPs by cutting back in other areas. But that doesn’t match up with the research. In a brief slated for publication in the November IZA World of Labor, Rutgers Professor Douglas Kruse writes that in almost all studies “employee ownership tends to come on top of market levels of pay.”
He adds that in comparisons of conventional and employee-owned firms, “employee owners in general reported higher levels of annual earnings, and were more likely to say they are ‘paid what they deserve’ and that their fringe benefits are good.”
Perhaps most importantly, employees at ESOP companies are less likely to be laid off. And that is true whether the economy is in recession or going great guns.
So employee owners at ESOP companies get a great retirement benefit that costs them nothing, often still have access to other retirement options such as pensions and 401(k)s, typically earn salaries at or above market level, and are more likely to keep their great pay and benefits because they are more likely to stay employed.
This last point is the most important, because the best pay and benefits in the world won’t amount to much if you can’t keep your job.