The ESOP Advantage

Productivity & Profitability of ESOP-Owned Companies

May 1, 2023

Employee Stock Ownership Plans (ESOPs) are a popular way for companies to provide their employees with an ownership stake in the company. ESOPs are a unique retirement plan that invest in the company’s own stock and are designed to give employees an incentive to work hard and increase the company’s profitability. ESOP owned companies are generally considered those that have at least 30% of their stock owned by an ESOP.

Profitability increases due to its positive correlation with increased productivity. Let’s more closely explore the relationship between ESOP ownership and productivity.

According to a study by the National Center for Employee Ownership (NCEO), ESOP owned companies have higher productivity growth than non-ESOP owned companies. The University of Pennsylvania, in a similar study, found that ESOP owned companies had an 8.3% higher productivity than non-ESOP company. This is a material difference which directly impacts the bottom line.

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When employees have a stake in the company, studies show they are more committed to its long-term success, leading to reduced turnover and the retention of valuable employees.

Why?

1. ESOPs provide employees with a sense of ownership and a stake in the company’s success, which can motivate them to work harder and more efficiently. This can lead to higher levels of productivity, as employees are more likely to be invested in the company’s success.

2. ESOP ownership can lead to greater employee engagement and involvement in decision-making. When employees have a stake in the company, they are more likely to be involved in important decisions and to feel that their input is valued.

3. ESOP ownership can help to align the interests of employees and management since those groups are co-owners. When employees have a stake in the company, they are more likely to be interested in the long-term success of the company, rather than just short-term gains. Accordingly, ESOP ownership helps to reduce employee absenteeism and turnover, which are generally a significant cost for employers.

Increased Productivity → Increased Profitability

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ESOP owned companies have been shown to have higher profitability levels than non-ESOP owned companies.

According to a study by the NCEO, ESOP owned companies had 2.3% higher profitability growth than non-ESOP owned companies. Additionally, a study by the University of Pennsylvania found that ESOP owned companies had 5.5% higher profitability than non-ESOP owned companies. There is evidence from hundreds of studies indicating a positive association, on average, between shared capitalism programs and companyperformance, but with substantial dispersion in results. Management must recognize the opportunity and motivate their teams to realize the benefit of common ownership.

What Lead to an Increase in Profitability?

Reduction in Turnover When employees have a stake in the company, they are more likely to be committed to the company and to stay with the company for longer periods of time. This can reduce turnover costs and help to retain valuable employees, which can ultimately lead to increased profitability.
Management/Employee Interests are Aligned This alignment increases the probability of “active participation” by the Employee base, who, realizing they are impacting their own future, take a more active role in identifying inefficiencies, problem solving, and taking a sense of job “ownership” and motivating those around them.

The evidence suggests that ESOP ownership can lead to increased profitability in companies by incentivizing employees with a stake in the company, reducing absence and turnover costs, and aligning the interests of employees and management, all while increasing employee productivity and morale.

Sources:

Kruse, D., Blasi, J., & Park, R. (2013). Shared capitalism at work: Employee ownership, profit and gain sharing, and broad-based stock options. University of Chicago Press.
Harvard: J Blasi, D Kruse, & R. Freeman: Having a Stake: Evidence and Implications for Broad- based Employee Stock Ownership and Profit Sharing
FitzRoy, F., & Kraft, K. (2015). Employee stock ownership and profit-sharing in Germany: The importance of organizational and institutional context. Economic and Industrial Democracy, 36(2), 295-317.
National Center for Employee Ownership. (2017). The ESOP model: Empowering employee owners, driving productivity.