What is An ESOP?
You're in luck. Employee-owned companies have a lot of friends out there working every day to help your company and your employee owners prosper.
The ESOP Association, ESCA, and NCEO are at work in Washington, D.C. and across the country delivering for their member companies every day, protecting your interests and making it easier for all of us to grow and maintain healthy ESOPs.
Employee Stock Ownership plan FAQ:
Who’s Out There to Help Me?
You’re in luck! Employee-owned companies have a lot of friends out there working every day to help your company and your employee owners prosper. The ESOP Association, ESCA, and NCEO are at work in Washington DC and across the country delivering for their member companies every day, protecting your interests and making it easier for all of us to grow and maintain healthy ESOPs.
All three organizations have a ton of resources and plenty of people out there to help you navigate the ESOP process and stay current on the issues. Some may want a little of your money along the way and perhaps some of your time as well. I highly recommend your involvement in each. They are all easily worth your time and treasure.
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What is an ESOP?
ESOP stands for Employee Stock Ownership Plan.
An internet search will get you this: An employee stock ownership plan or ESOP is an IRS-qualified, defined contribution plan that provides a company’s workers with retirement savings through their investments in their employer’s stock, at no cost to the worker.
For a more functional answer, I also asked Dr. Joseph Blasi, Director of the Institute for the Study of Employee Ownership and Profit Sharing at the School of Management and Labor Relations at Rutgers University. His definition was so much better.
“An ESOP is a way for regular workers and managers to buy the company where they work without dipping into their wages or savings. Think of it this way, when a real estate developer buys a building, he or she does not dip into his or her own pocket and use cash. They figure out what the rents on the apartments or stores will be and then they see if they can get a loan to buy the building with the rents paying back the loan. At the end, they become the 100% owner.”
“An ESOP is just like that,” Blasi explained. “Workers and managers set up a trust. They ask the existing owners of the business how much they want for all or part of the company. Then creating an ESOP is just a simple three-step process:
- The trust figures out if the company’s income can pay back a loan to buy the company. If yes, then…
- The trust borrows the money from a bank to buy the company and pays back the loan out of the company’s income…and now comes the good part…
As the loan is paid back, shares in the company are granted for free to the workers. That’s it.”
What are they doing at Rutgers?
On March 7th, 2018, the Rutgers School of Management and Labor Relations formed the Institute for the Study of Employee Ownership and Profit Sharing. Their study of binary economics and capital sharing, however, has been understood and expansive for decades. The Institute is run by my growing friend, Dr. Joseph Blasi.
For those of us who drink, eat, and sleep the belief that employees who are owners and owners who are employees will outperform their counterparts under virtually any circumstance, the work done by the researchers at Rutgers has been intensely gratifying. The Rutgers team has proven convincingly over the vast American economy as a whole what our lived experience has shown us in our own unique companies.
For me, the seminal work is The Citizen’s Share. “In The Citizen’s Share, my thinking that had developed over almost 40 years of boots-on-the-ground direct experience was confirmed. Employee ownership is the answer . . . it’s what we’ve been looking for to right the American economy.” Thankfully for me and many others, Blasi and team proved the experimental hypothesis to be correct—at the national level, for the firm, and, ideally, for the worker.
But there’s more help here than just the proof that we all happen to be right. “The purpose of the Institute is to study the various ESOP models that have emerged and will emerge of employee-ownership shares and profit shares in the corporation and society of the United States and around the world. The Institute studies approaches that broaden financial participation and inclusion in the economy and business organizations and allow employees to be fully engaged and share the rewards of their work.”
I’ve said this before, but I’ll say it again: I highly recommend two of their publications starting with the oft-mentioned The Citizen’s Share and Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing and Broad-based Stock Options.
ESOP Information & Resources
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The ESOP Association
Employee-Owned S Corporations of America
National Center for Employee Ownership
School of Management and Labor Relations