Why Being an ESOP Matters: As an Employee and as a Customer
The success of a company is directly linked to retaining motivated and highly engaged employees. An employee-owned business model can create a sense of ownership in the minds of employees and provide an incentive to not only work hard but to build a career. This is called an ESOP structure; ESOP stands for Employee Stock Ownership Plans, and since being formally established in 1974 they have greatly expanded. Today, there are nearly 7,000 ESOPs in the U.S., with approximately 28 million employees participating (NCEO). In this blog, we’ll cover what an ESOP is, as well as how this structure can benefit both employees and customers.
What is an ESOP?
An Employee Stock Ownership Plan, or ESOP, is a retirement plan similar to a 401(k) except the invested dollars go back into the company instead of elsewhere. This provides stock ownership to all employees — giving them a tangible stake in the company’s success.
Typically, each employee’s account is accredited with shares of company stock or cash contributions throughout the individual’s employment. After retirement, death, disability, or parting ways, the employee’s account is distributed to them (or their beneficiaries) in shares of stock, cash, or a combination of both. The amount disbursed is determined by various factors, but primarily the market value of the company stock and how many shares the employee has.
Employees can make tax-free contributions, however, there is typically a vesting (waiting) period before any benefits can be earned. ESOPs are designed to benefit longer-term employees. The longer someone stays with an ESOP, the more vested they become and the more benefits can be realized. In addition to creating ownership opportunities for the employees, there is also a tax advantage to being an ESOP. Whatever portion of the company is owned by the ESOP pays no federal or state corporate income tax.
What are the benefits of an ESOP to employees?
Retirement benefits can be hard to find these days. Typically, companies offer 401k plans and that may or may not include any company contributions. ESOPs, however, build retirement funds over time without any monetary investment by the employee. And according to the National Center for Employee Ownership, ESOPs provide retirement benefits that are both much larger and much more equitably distributed than other retirement plans.
Employee ownership can strengthen workplace culture. Employee owners often feel as though they have bigger voices in decision-making, making them more engaged with the company. When performance matters, it can lead to a greater sense of job satisfaction. Employees are more likely to address issues, act in the company's best interest, and solve problems. Employee ownership improves trust in the company and can foster a greater sense of teamwork and job satisfaction. According to a study of General Social Survey (GSS) data, employee-owners are 20-50% less likely to seek new jobs, and overall job satisfaction at ESOP companies consistently outpaces privately-held firms.
What are the benefits of an ESOP to customers?
Customers benefit from ESOPs as well. They may receive better customer service because employee-owners are more vested in the company and have a strong interest in retainment and revenue growth. Customers who choose to work with ESOPs may likely notice high-quality customer service at every touch point. The stakeholders are highly motivated and engaged, resulting in better familiarity with products, service offerings, and even valuable procedural or institutional information.
Customers can also expect consistency when it comes to working with ESOP companies. There is less turnover at ESOP companies, which means long-term relationships can form. The very nature of employee-owned business lends itself to business continuity and succession planning, which means ensuring long-term success for the ESOP and its business partners is a critical aspect of the model.
Finally, ESOP companies provide stability. The COVID-19 pandemic challenged businesses in unexpected ways. But despite the struggles, ESOPs across the board fared better in job retention, benefits, and workplace safety, according to a study from Rutgers University and the Employee Ownership Foundation. A survey of ESOP construction firms showed more than two-thirds of respondents had no impact from the pandemic in relation to cash flow and liquidity, culture, or sustainability. And this isn’t a new concept, previous studies have touted strong performance by ESOPs in both boom and bust business cycles.
Employee ownership aligns interests and intertwined outcomes. ESOP plans encourage employees to face company challenges and successes as a team, leading many to see their work as a career and not just a job. By doing so the company, employees, and even customers reap the rewards of stable work environments, loyalty, and productivity.
ESOP companies embody an ownership culture and Kentwood Office Furniture is proud to be an employee-owned company. Our employee-owners are uniquely qualified to help other business owners create spaces that meet the needs of their employees and customers. Every person on the Kentwood Office team is invested in the success of our company, which is directly tied to the satisfaction and success of our customers. This means our customers receive the best service, we have a sales team that actively builds strong relationships, and all of our employees think strategically about how to do their jobs with excellence — a win-win for their careers and our company. From management to sales to design to machine operators and woodworkers alike, being an employee-owner rewards dedication and hard work, and serves as an incentive for continuous business growth.