Employee Ownership
Employee Ownership
Employee ownership is a proven strategy to retain domestic ownership and investment while building generational wealth for American workers.
How can we revitalize the middle class and ensure that low and moderate-income workers across the country directly participate in the growth of the American economy? There is a bipartisan and market-tested solution: employee ownership.
Employee ownership is among the most unsung economic policy success stories in America. Its successful track record spans several decades and thousands of high-performing businesses that have created over hundreds of billions of dollars for American workers. In addition to financial security, many employee-owned businesses have created cultures of high engagement that reinforce a sense of connection at work—a precious attribute in an era of declining social capital.
Employee ownership offers are a part of the answer to a number of critical questions:
- How do we repair the relationship between work and wealth?
- How do we protect our workforce from offshoring and automation?
- How will we maintain our economic security and national competitiveness as businesses operating in strategic sectors go up for sale?
- How can we better insulate our labor market from the shocks of economic downturns?
- How do we maximize retirement security for all Americans?
- How can we best position American workers and firms to outperform global competitors?
- How can we preserve and expand economic opportunity in rural America?
- How can we support the American middle class and ensure that low-and-moderate income workers have meaningful pathways to economic advancement?
- How can we strengthen families and communities by preserving the dignity of work?
- How do we make shared prosperity an intrinsic feature of American capitalism?
Both evidence and experience demonstrate that employee ownership offers answers to each of these essential questions. Despite its impressive track record and long history of bipartisan support, employee ownership is too often conspicuously absent from the conversation on remedies and solutions.
Lafayette Square Institute is focused on developing bipartisan policy solutions to accelerate the growth of employee ownership to build a more broadly prosperous American economy.
Employee ownership is a proven strategy to retain domestic ownership and investment while building generational wealth for American workers. It’s a strategy needed now more than ever considering the backdropi:
A lack of good jobs. With the decline in manufacturing jobs, people without college educations or special skills have difficulty finding rewarding employment. Too many jobs offer little financial security and provide insufficient benefits that leave American workers ill-equipped for retirement.
Concentrated ownership. Stock ownership is a highly concentrated asset. As of X year, the top decile of Americans own 84% of all US-owned stock, a figure that includes shares held in 401(k) accounts and pension funds. Almost half of Americans own no assets whatsoever. Meanwhile, about half of Americans 55 and older have zero retirement savings.
High returns to capital, low returns to labor. Over. The last five decades, inflation-adjusted wages for nonsupervisory workers were essentially flat. Meanwhile, a dollar’s worth of stock grew in real terms to $14.09. In addition to increasing the returns to labor, it is imperative to broaden the participation in capital ownership to ensure the benefits of economic growth are widely enjoyed across the country.
Distant and disconnected ownership. Absentee ownership is a pervasive feature of U.S. capital markets. When companies are routinely acquired, divested, and exchanged as financial assets it too often weakens the relationship between the business and its workforce and communities of operation. These dynamics exacerbate the decline of social connectedness in the places where Americans work.
Employee Ownership: An Introduction
The bipartisan roots and policy rationales for employee ownership first entered federal law in 1973 through the Employee Retirement Income Security Act (ERISA) championed by Senator Russell Long of Louisiana. Employee ownership has a decades-long track record of creating significant social and economic value for workers, local communities including rural areas, and the financial bottom line. These economic benefits are exceptionally significant for low and moderate-income workers including workers of color.[1] Employee-owned businesses have been demonstrated to generate 2.5 times more retirement wealth for workers compared to conventional companies, and have also been shown to grow faster, innovate more frequently, enjoy higher productivity, lay off fewer workers during economic downturns and provide superior pay and benefits including an ownership stake that significantly supplements other retirement income.[2]
Employee ownership is also a particularly effective tool in strengthening and retaining the domestic manufacturing base (the manufacturing sector has produced more ESOP companies than any other industry[3] and ensuring that American industry remains globally competitive. Finally, employee ownership is also an effective policy prescription at the regional level; employee-owned companies increase the retention rate of local business ownership while simultaneously building wealth for workers in economically distressed areas that frequently struggle to attract sufficient levels of private investment to keep their economies thriving.[4]
While tax incentives for selling owners have helped to produce modest levels of employee ownership in the U.S. economy,[5] employee ownership remains a peripheral phenomenon. Only about 3 million workers across roughly 6,000 privately held companies currently have access to significant broad-based ownership stakes—a figure that excludes public companies that are typically 1 to 5 percent ESOP-owned.[6]
The Silver Tsunami
The opportunity to scale employee ownership is fast approaching a demographic tipping point. As the baby boomer generation exits their businesses over the next ten years, the fate of their companies and the jobs they have worked hard to build will be in question. This so-called “silver tsunami” will constitute the largest wealth transfer in history.[i] For many, the absence of an interested successor will necessitate the sale to either a buyer that may not be committed to retaining local jobs and investment. Employee ownership is a key business succession alternative, but gaps remain in the value proposition for business owners and investors who are the key stakeholders in determining how and when a business is sold.
A key barrier preventing further adoption and scale is capital
Given that prospective employee owners generally have limited equity capital to initiate their purchase of the selling business owner’s interests, transactions that would create meaningful employee ownership are often dependent upon a combination of 1) bank leverage using company assets as collateral and 2) sellers taking back substantial subordinated, long-term notes. The seller in these transactions must often wait for five to ten years to fully realize the cash proceeds of the sale of their business to employees, which is often viewed by the seller as unacceptable–as a result, the overwhelming majority of ESOP transactions relies the relatively narrow segment of selling owners that are willing to self-finance a significant part of the transaction.
Lafayette Square Institute has partnered with federal policymakers on both sides of the aisle to develop pragmatic solutions to address the financing gap that is impeding employee ownership from reaching a meaningful level of scale. In 2023, U.S. Senators Chris Van Hollen (D-MD) and Marco Rubio (R-FL) introduced the bipartisan Employee Equity Investment Act alongside U.S. Representatives Blake Moore (R-UT) and Dean Phillips (D-MN) with a number of additional cosponsors in both chambers. The bill would address this capital access gap by mobilizing private institutional capital sources with federally backed, low-cost capital at zero subsidy cost to the taxpayer.