If your company is not sharing ownership widely with employees, it should. Don’t take my word for it. Billionaire entrepreneur Mark Cuban put it well in a recent LinkedIn interview:
Said Cuban: “If you’re running a company and you need help from your employees, give them equity. Give them stock in a meaningful way, because you’re going to need them to grow your company. We’re all going to need them to grow this country and this world back to where we were economically.” Cuban himself has done just that by giving equity grants to employees of all the companies he has started.
The arguments for this idea are compelling:
1. Employee ownership works: Companies with the main form of employee ownership, the Employee Stock Ownership Plan (ESOP), grow 2.5% per year faster relative to their competitors after they set up a plan than they did before. Studies of ESOP companies between 2009 and 2013, which included the last recession, showed that ESOP companies defaulted on their loans at just two per thousand, per year. Based on quadrennial General Social Survey data back to the early 2000s, employees in employee ownership plans are laid off at one-third to one-fifth the rate of those who are not, depending on the survey year. In the 2008-09 recession, public companies with these plans rebounded faster than those without them.
2. Employee ownership is a politically bipartisan way to address wealth insecurity: Just over 20% of all Americans have no wealth at all. Forty percent of Americans cannot cover a financial emergency with available cash, forcing them to borrow money, incur credit card debt, raid their retirement accounts (if they have one), or other less than optimal choices. Only about half of working-age Americans have retirement savings of any kind. Americans in the bottom half economically of the U.S. population have seen their wealth shrink since 1989 in terms of buying power after inflation. Meanwhile, real, inflation-adjusted wages are just 10% higher today than in 1964. By contrast, employees in ESOPs have 2.2 times the retirement assets of those employees lucky enough to have any retirement plan at all, and the establishment of an ESOP has only minimal effect on existing company contributions to 401(k) plans.
3. ESOPs are more racially fair: The net worth of a typical white American family is almost 10 times greater than that oft heir black counterparts. According to the Federal Reserve Bank of St. Louis, about 60% of white workers have retirement accounts, compared to 40% of black workers and 25% of Hispanic workers. The median ownership of stock by white families is nearly eight times as high as black families. Median white-family wealth was $163,000 in the most recent analysis, compared to $16,000 for Black families and $22,000 for Hispanic families.
Based on data from the Census Bureau’s National Longitudinal Survey of millennials, the median household net wealth among respondents of color working in ESOP companies was $16,450, compared to $9,175 for those not in these plans, while their median job tenure was 5.2 years, compared to 3.3 years for those not in these plans. Their median wage was $28,000, compared to $24,00 for those not in these plans. Because wealth accumulates most rapidly if employees have stable jobs and an early nest egg, these differences are likely to magnify to very large numbers over time.
ESOP plans also are fairer than 401(k) plans because they are funded entirely by the company, based on a formula such as relative pay or something more equal, not based on what employees can afford to defer into the plan.
True recovery from this recession requires reinvention and resiliency. That, in turn, requires buy-in from American business owners and workers. Employee ownership companies have been the leaders in generating ideas and finding solutions to spur economic growth.
Businesses can share ownership in two ways: ESOPs are a flexible, highly tax-favored way to transfer ownership to employees for closely held company owners looking to make a transition. Or like Cuban, you can make equity grants directory to employees. There is a right approach for almost any company.
If you own a business and like this idea, then make it happen. Several states provide education for business owners on how these plans work. These centers have been strikingly effective on generating more ESOP creation. In Congress, there are now bills from such unlikely philosophical allies as Ron Johnson (R-WI) and Alexandria Ocasio-Cortez (D-NY), reflecting a 45-year history of bipartisanship on this topic.
The Johnson bill would make a grant of $20,000 per employee to any company using money from the CARES Act that makes certain kinds of growth investment — provided they contribute shares with an equal value to employees through a new or existing ESOP. The Ocasio-Cortez bill would require that require major corporations receiving federal aid related to COVID-19 “make annual payments of equity to employees of the corporation while such aid is outstanding.” The amount of equity would have to be at least as much as was granted to any employee in prior years (mostly that would have gone to top executives).
These days, practical, politically feasible, effective ideas on moving the U.S. economy forward in a way that is both fair and productive are scarce. Employee ownership is a clear solution that deserves our attention.
Corey Rosen is the founder of the National Center for Employee Ownership.