S-ESOPs establish employee retirement trusts into which the company contributes equity – giving their employees a direct long-term ownership stake. Essentially, S-ESOPs turn employees into owners. This business model has many effects on growth and strategy, but below are three that stand out.
First, the employees begin to think like owners. From the time they receive their first account statement, employee-owners tangibly see that they do, in fact, own the company. Aligning the incentives of the company and its employees, so that everyone is pushing toward the same goal, improves productivity.
Second, because the stock contributions are going toward a dedicated retirement fund, employee-owners have a long-term interest in the company’s success. A long-term focus adds to stability. This helps S-ESOPs avoid the quarter-to-quarter performance cycle to which other companies are subject.
Third, managers are more attuned to the risks they take, as their decisions impact the people they see and talk with every day. Large, riskier mergers and acquisitions often seen in the private sector rarely occur with S-ESOPs, who carefully manage cash flow to return value to their employees in the long run.
Overall, these positive forces feed back to the employee-owners, who enjoy better and more stable retirement savings. Data from 2008, show that the value of S-ESOP assets per participants were higher than the average 401(k) value—$100,000 to $45,500. Additionally, 65 percent of S-ESOPs also offer a 401(k). Only 45 percent of American businesses offer any retirement plan at all. Because the S-ESOP trusts are predominantly funded by the company, not the employee, S-ESOPs mitigate the financial risks that employees could face.