In the ongoing battle to find and keep the best workers, here's another tool more and more companies are considering: ESOPs.
Employee stock ownership plans allow businesses of all sizes — from S corps to C corps — to make employees the owners of the company. They also give business owners a way to sell their company without having to look for an outside buyer, or depend on the next generation of family to take over.
And now increasing numbers of small to mid-sized companies and some start-ups are looking at ESOPs as yet another attractive benefit they can offer job candidates. For industries with high turnover, such as hospitality and trucking, ESOPs can be an effective tool for recruitment and retention. After all, workers are more likely to stay when they know they have the chance to accumulate some significant wealth down the road.
Legislation signed into law this summer now makes converting to an ESOP easier. The Main Street Employee Ownership Act allows the Small Business Administration to make its loan guarantee programs more readily available to companies looking to transition to an employee stock-ownership plan. In the past these companies often had trouble getting loans through regular banks.
New York Sen. Kirsten Gillibrand, an early champion of the idea, came up with a bipartisan plan that had the best chance of passing. She and others recognized that employee ownership is one of the more effective ways for workers, who contribute to a company's success, to actually share in its value as it grows.
"We talk about income inequality in this country, but ESOPs are a solution to wealth inequality," said Keith Butcher, co-founder and managing partner of ButcherJoseph, an investment bank that specializes in helping companies transition to ESOPs. Butcher helped draft the recent legislation. "Over the long-term, employees can develop significant equity balances and really participate in the growth of the business," he said.
And because workers have a financial stake in the success of the company, studies show that ESOPs are a great tool for retaining employees and motivating performance. In fact, nearly 75 percent of ESOP companies surveyed by the ESOP Association said they had better year-over-year performance as a result of their structure, and only 15 percent said they had worse performance.
The plans were formalized by Congress in 1974 when plan details were laid out in the Employee Retirement Income Security Act (ERISA). While some notable companies, like Wawa and Publix Supermarkets, offer them, they remain a modest part of total American stock holdings, at $1.3 trillion.