In July, Alex Brill, an advisor to the Simpson-Bowles bipartisan deficit reduction commission and a fellow with the American Enterprise Institute, highlighted the growth of ESOPs over the past decade in the study, An Analysis of the Benefits S ESOPs Provide the U.S. Economy and Workforce.
Brill conducted his analysis based on data from the Department of Labor and the Bureau of Labor Statistics, as well as data from a private survey of ESCA members. Further, with data from the Department of Labor, Brill demonstrates how ESOPs—and in particular S ESOPs—contribute positively to job creation in the U.S. economy by promoting employee commitment.
Specifically, Brill’s study found that S ESOP companies showed substantially more employment growth and were able to regain financial momentum faster in the pre-2008 recession period than private businesses. Remarkably, Department of Labor data also shows that the number of S ESOPs and the number of active S ESOP participants have each more than doubled since 2002. In particular, in 2007 when the recession hit, private U.S. employment took a dramatic downward turn while active participants among this subset of S ESOPs actually increased. Among surveyed S ESOP companies, jobs actually grew by 60 percent over the past decade, while jobs in the private economy remained relatively flat.
The growth is particularly noticeable within the manufacturing industry, where employment has been trending downward in the United States for the past decade. Many ESOPs are in the manufacturing industry and compared to U.S. manufacturing generally, the S ESOP structure served as a buffer from the recession for S ESOP manufacturing firms.
So what exactly caused these S ESOPs companies to prosper during the recession? Brill points out that “firms that employ S ESOPs have been shown to outperform other companies by several measures.” He highlights the importance of employee commitment and references a number of other studies to further support his claim that, “Employee commitment has been found to be a driver of job satisfaction, motivation, and attendance.” Engaging employees in the company through an ESOP invests them both personally and financially, which ultimately pushes them to work harder and more efficiently, because the company’s success is literally their success. Employee-owned companies also incur fewer expenses because turnover is low, because, once again, employees are committed to the company they work for!
Overall, Brill makes the case that, “These positive effects of employee commitment, including worker efficiency and lower operations costs, lead to increased profitability, which in turn allows companies to grow at a faster rate because they can invest more, hire more workers, and increase output.”
These findings reaffirm many employee-owned companies’ claims that their business model is not only more efficient but also more financially savvy. This study is the hard data many decision makers need to promote employee-owned firms. As Brill says, “Policymakers should recognize the evidence in support of S ESOPs and their positive economic contribution.”