As corporations blow record sums repurchasing their stock to inflate CEO pay, Congress is advancing a tax aimed at curbing this harmful practice.
Cathy Burch and her twin sister Deborah began working 27 years ago, at the age of 19. Cathy took a job at WinCo, a supermarket chain. Her sister went to work at a telephone company. Cathy stayed at WinCo; Deborah moved around. By 2014, an article in Forbes reports, Deborah had about $30,000 in retirement savings, fairly typical for her age group. Cathy, who stayed at WinCo, had nearly $1 million saved for retirement.
WinCo, it turns out, is employee-owned through a stock ownership plan, and its stock has done quite well. As an employee, Cathy gets an annual allocation of stock at no cost to her. Cathy’s story is exceptional, but workers at employee-owned companies, research shows, fare a lot better in accumulating assets than those who do not. Their companies do better too.
In the search for solutions to inequality, many understandably focus on income. But wealth inequality is every bit as big a problem. It can seem difficult to find solutions that are practical and politically feasible. But one idea — employee ownership — has broad support and has proven a dramatic impact.
Employee ownership can take a variety of forms. Companies often grant stock options or restricted stock to most or all of their employees, which gives them an equity stake in the company they can cash in after several years. The other popular option is employee stock ownership plans (ESOPs), company-funded employee benefit plans that operate through a trust that holds shares for employees.
ESOPs are subject to strict rules to ensure the ownership stakes are divided among employees in an equitable way. In return, companies and their owners get substantial tax incentives. Retiring owners of closely held companies often use ESOPs as a tax-favored way to transition out of the firm. There are about 14 million participants in ESOPs, with over $1 trillion in assets, and another 8 to 9 million recipients of stock options or restricted stock.
ESOPs are the most important of these tools — and the most effective. In a recent study, my colleague Nancy Wiefek of the nonprofit National Center for Employee Ownership analyzed data from the Bureau of Labor Statistics’ National Longitudinal Survey of millennials. The data shows that participants in Employee Stock Ownership Plan (ESOPs) fared strikingly better compared to other young workers.
The study, Employee Ownership and Economic Well-Being, found that:
- Employee-owners in this dataset have 33 percent higher median income from wages overall. This holds true at all wage levels, ranging from a difference of $3,160 in annual wages for the lowest-paid employee-owners to an extra $5,000 for higher-wage workers.
- Median household net wealth among respondents is 92 percent higher for employee-owners than for non-employee-owners. This disparity holds true for the great majority of subgroups analyzed, including single women, parents raising young children, non-college graduates, and workers of color.
- Employee-owners are much more likely to have access to an array of benefits at work, including flexible work schedules, retirement plans, parental leave, and tuition reimbursement. For example, 23 percent of employee-owners have access to childcare benefits, compared to 5 percent of non-employee-owners.
- Employee-owners in this dataset have substantially more job stability than non-employee-owners: their median tenure with their current employer is 5.2 years, compared to 3.4 years for the non-employee-owners.
These results hold up in other studies on the 14 million participants in ESOPs. Research from the National Bureau of Economic Research, Rutgers, our organization, and elsewhere finds that employees in these companies get paid more, have 2.2 times the retirement assets, and are one-third to one-fifth as likely to be laid off, all paid for because their companies perform better. ESOP companies also generate about 2.5 percent more jobs per year than would have been expected absent an ESOP.
Although the concept of employee ownership has broad bipartisan support, it is not the top of many agendas politically. Prominent pundits don’t often talk about it, and it’s rare for reporters writing about wealth and income inequality to mention it. This idea works, and it’s both politically practical and economically successful.
The growing popularity of employee ownership is reason to be encouraged. Committees in both Houses of Congress, for instance, passed two different bills without dissent to increase the Small Business Administration’s programs on employee ownership.
The policy has also won high-profile champions. Senator Gillibrand led the effort on the Main Street Employee Ownerships Act. Visiting an employee-owned company, she said “Too many hardworking New Yorkers are still struggling to get jobs that pay them enough to take care of their families, pay for their children’s tuition, and save for retirement, because their companies care more about shareholder value than their own workers.”
“Companies can absolutely reward work without sacrificing profit, and ESOPs are a proven way to do it,” Gillibrand continued. “I will continue to fight as hard as I can in the Senate to pass legislation that rewards work and supports employee ownership around New York and the country.”
We would all do well to join her.