‘Expanding ESOPs’ Coalition Aims to Increase Awareness

A coalition of more than 50 major foundations, financial institutions, advisory firms, law firms and advocacy groups launched the Expanding ESOPs initiative on Tuesday, intended to promote wider adoption of employee stock ownership plans.

The initiative aims to enhance the current ESOP model and make it both simpler and more accessible to businesses of all sizes and from all industries.

“Employee ownership gives workers a stake in their companies and a seat at the table,” Pete Stavros, the organization’s head and the co-head of global private equity at private equity firm KKR, said in a statement. “Polling clearly shows that Americans across the political spectrum want to see workers participate in company ownership to a far greater extent, and ESOPs represent our best shot of achieving that goal.”

The group, in particular, aims to increase the prevalence of partial ESOPs, which take a minority interest in the business.

“Expanding ESOPs aims to reverse the decline in partial ESOPs while maintaining 100% ESOPs in their current form,” the group wrote in a statement.

James Bonham, president and CEO of the ESOP Association, in a July 1 article titled “What Private Equity Gets Right, and Wrong, About Employee Ownership,” wrote that the new group is “is seeking federal legislative and regulatory changes that would provide incentives for PE firms to offer equity stakes in more of their acquisitions, especially larger companies.”

Bonham wrote that the new group “does make a few compelling arguments,” but, he wrote, “there is genuine and legitimate cause for concern with some of the proposed ideas being advanced by the Expanding ESOPs coalition. First, their new version of ‘ESOPs’ is not employee ownership, no matter how much they may want to ride on our coattails. It’s more like profit sharing, and it’s conditional on the business being sold for a large enough profit and on employees working for the company at the time of sale.”

A traditional ESOP is a program that gives employees ownership interest in the company. Through an ESOP, a company sets up a trust fund and allocates shares to employees based on factors like salary or tenure.

Employees earn company shares as part of their benefits. The shares vest over time, and employees gain full ownership once they meet specific requirements. Upon leaving or retiring, they can sell the shares back to the company. ESOPs offer tax advantages to both companies and employees and are often used for succession planning and employee retention.

ESOPs were established under federal law in 1974 with the passage of the Employee Retirement Income Security Act. Currently, about 250 new ESOPs are formed each year, primarily among smaller businesses. Only about 4% of companies with newly created ESOPs have more than 500 employees. Additionally, these plans are concentrated in a few industries, with 75% of new ESOPs found in the industrial and service sectors.

“ESOPs have been around a long time, and they are an incredible wealth creation tool for workers who have been able to participate, but we simply haven’t had enough of them,” Corey Rosen, founder of the nonprofit National Center for Employee Ownership, said in a statement. “ESOP participants and their families have 92% greater net household wealth than those without comparable benefits.”

As part of its announcement, Expanding ESOPs launched a website to educate the public and policymakers about the organization and its goals.

At an April conference, Employee Benefits Security Administration Head Lisa Gomez said the Department of Labor is working on a proposal regarding adequate appraisal of the value of shares in ESOP plans, as many of the companies that issue shares to their employees as part of this type of qualified retirement plan only have a very small public market, if any at all.

Section 346 of the SECURE 2.0 Act of 2022, known as the WORK [Worker Ownership, Readiness, and Knowledge] Act, mandated that the DOL issue regulations in this area to establish legal certainty. ESOP adequate consideration appeared in the DOL’s Fall 2023 regulatory agenda.

As seen in Plan Advisor and written by Natalie Lin.