In addition, we estimate that roughly 9 million employees participate in plans that provide stock options or other individual equity to most or all employees. Up to 5 million participate in 401(k) plans that are primarily invested in employer stock. As many as 11 million employees buy shares in their employer through employee stock purchase plans. Eliminating overlap, we estimate that approximately 32 million employees participate in an employee ownership plan. These numbers are estimates, but are probably conservative. Overall, employees now control about 8% of corporate equity. Although other plans now have substantial assets, most of the estimated 4,000 majority employee-owned companies have ESOPs.

Major Uses of ESOPs

About two-thirds of ESOPs are used to provide a market for the shares of a departing owner of a profitable, closely held company. Most of the remainder are used either as a supplemental employee benefit plan or as a means to borrow money in a tax-favored manner. Less than 10% of plans are in public companies. In contrast, stock option or other equity compensation plans are used primarily in public firms as an employee benefit and in rapidly growing private companies.

Employee Ownership and Corporate Performance

A 2000 Rutgers study found that ESOP companies grow 2.3% to 2.4% faster after setting up their ESOP than would have been expected without it. Companies that combine employee ownership with employee workplace participation programs show even more substantial gains in performance. A 1986 NCEO study found that employee ownership firms that practice participative management grow 8% to 11% per year faster with their ownership plans than they would have without them. Note, however, that participation plans alone have little impact on company performance. These NCEO data have been confirmed by several subsequent academic studies that find both the same direction and magnitude of results.

How ESOPs Work

Companies set up a trust fund for employees and contribute either cash to buy company stock, contribute shares directly to the plan, or have the plan borrow money to buy shares. If the plan borrows money, the company makes contributions to the plan to enable it to repay the loan. Contributions to the plan are tax-deductible. Employees pay no tax on the contributions until they receive the stock when they leave or retire. They then either sell it on the market or back to the company. Provided that an ESOP owns 30% or more of company stock and the company is a C corporation, owners of a private firm selling to an ESOP can defer taxation on their gains by reinvesting in securities of other companies. S corporations can have ESOPs as well. Earnings attributable to the ESOP’s ownership share in S corporations are not taxable.

In other plans, approximately 800 employers partially match employee 401(k) contributions with contributions of employer stock. Employees can also choose to invest in employer stock. In stock option and other individual equity plans, companies give employees the right to purchase shares at a fixed price for a set number of years into the future. (Do not confuse stock options with U.S. ESOPs; in India, for example, employee stock option plans are called “ESOPs,” but the U.S. ESOP has nothing to do with stock options.)

How Employees Benefit

Participants in ESOPs do well. A 1997 Washington State study found that ESOP participants made 5% to 12% more in wages and had almost three times the retirement assets as did workers in comparable non-ESOP companies.

According to a 2010 NCEO analysis of ESOP company government filings in 2008, the average ESOP participant receives about $4,443 per year in company contributions to the ESOP and has an account balance of $55,836. People in the plan for many years would have much larger balances. In addition, 56% of the ESOP companies have at least one additional employee retirement plan. By contrast, only about 44% of all companies otherwise comparable to ESOPs have any retirement plan, and many of these are funded entirely by employees.

New Research on the Repurchase Obligation

A core concern for most ESOP companies is the repurchase obligation. The results of our recently concluded 2023 ESOP repurchase obligation survey are in, with 248 valid responses from participants, most of which were S corporations. The median percentage of outstanding shares repurchased in the most recent fiscal year was 5%, with the average being 6%. Eleven percent repurchased 0%, and 17% repurchased more than 10%. The full survey results are covered in a 72-page report.

Examples of Major ESOP Companies

ESOPs can be found in all kinds of sizes of companies. Some of the more notable majority employee-owned companies are Publix Super Markets (230,000 employees), Houchens Industries (18,000 employees), W.L. Gore and Associates (maker of Gore-Tex, 12,000 employees), and Davey Tree Expert (11,350 employees) (see our Employee Ownership 100 list). Companies with ESOPs and other broad-based employee ownership plans account for well over half of Fortune Magazine’s “100 Best Companies to Work for in America” list year after year.

For Further Reading at NCEO.org

Below are a few good starting points at our main website; see our Find Your Resource page to explore further, especially the “Start Here” pages:

• How an Employee Stock Ownership Plan (ESOP) Works
• Using an ESOP for Business Continuity in a Closely Held Company
• Start Here: ESOP Participants (answers questions if you are an ESOP participant)
• ESOPs in S Corporations
• Limited Liability Companies (LLCs) and Employee Ownership
• Stock Options, Restricted Stock, Phantom Stock, Stock Appreciation Rights (SARs), and Employee Stock Purchase Plans (ESPPs) (a different way than ESOPs to provide equity)