NCEO study once again proves economic benefit of ESOPs

July 9, 2014

Home News NCEO study once again proves economic benefit of ESOPs

A report released by the NCEO confirms what we already know: that when private businesses are owned by their employees, incentives and vision align to make them more stable, more successful and better for employees as well as the larger economy.

The report released last week, found that the default rate on bank loans to ESOP companies during 2009-2013 was, on average, an unusually low 0.2 percent annually, compared to mid-market companies in the U.S. that typically default on comparable loans at an annual rate of 2.0 to 3.75 percent. This again shows us that private employee-owned businesses default on their loans far less than other businesses.

So why are ESOP default rates this low? Often ESOPs secure bank loans to enable employees to buy their companies from prior owners, and loans are paid off out of the companies’ cash flow.  When companies are economically hard hit, they default on loans. The fact that “ESOP companies default 10 times less frequently than other businesses, is testament to the unique economic strength of employee-owned businesses,” said ESCA President and Executive Director Stephanie Silverman.

“ESOP companies fail less often than other businesses because everyone in the company is a stakeholder,” said Stan Slabas, a member of the Board – and former CFO – of S&C Electric Company, a Chicago-based manufacturer of innovative electric power equipment that is 100 percent employee-owned through an ESOP.

Stan tell us that in order to become an ESOP, S&C borrowed from several banks and a private lender, and then loaned the proceeds to its ESOP so it could acquire the company on behalf of S&C’s workers.  He says, “We’re living proof that the confidence that a growing number lenders have in financing ESOP transactions has been well justified.”

This report isn’t the first to show that S ESOP companies weather economic storms better than their non-ESOP counterparts. In fact, a 2010 Georgetown University study by economists Phillip Swagel and Bob Carroll, both former senior Treasury Department officials, found that, during the most recent economic recession, S ESOP firms increased employment by nearly 2 percent while employment in the private sector fell by nearly 3 percent.

In his 2013 study, Macroeconomic Impact of S ESOPs on the U.S. Economy, Alex Brill of the American Enterprise Institute wrote, “Beyond the immediate benefit they provide to employees and customers, S ESOPs’ positive outcomes yield benefits to the U.S. economy broadly.” Brill’s research found that total direct and indirect output from S ESOP companies accounts for nearly 2 percent of GDP.

Today, bipartisan legislation is pending in both the House and Senate to enable more private companies to convert to employee ownership.  The House version of that measure, HR 4837, also encourages banks to lend to companies to help them become ESOPs or grow employee ownership of the company.

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