Article: Show Them the Money

By Adria Scharf, Ownership Associates
Published in the November/December 2001 issue of the ESOP Report by the ESOP Association.

Want to see your CFO squirm? Ask how much your ESOP account could be worth when you retire. CFOs are burning to tell you what they hope accounts will be worth, but they know they can’t make promises.

While forecasting the value of any individual ESOP account is impossible, we now have information on the value of ESOP accounts in general--information sure to aid managers in communicating the value of the ESOP as a financial benefit.

To what extent do Employee Stock Ownership Plans (ESOPs) transfer wealth to employees? This “wealth question” lies at the heart of the ESOP experiment. And yet, until recently we had little idea to what extent, or if, ESOPs do in fact put assets into the hands of employees.

Wealth Matters

The wealth question is important for several reasons.

First, from the company perspective, the promise of sharing the wealth is what makes the ESOP an effective retention and recruitment tool. If employee stock ownership represents real potential for sharing wealth with employees, companies--and their workers--should know the facts about how well this idea delivers on its promises.

Second, wealth sharing was a key rationale for the creation of ESOP law. A review of the legislative history surrounding ESOPs makes it clear that Senator Russell Long led the effort to include ESOP provisions in US pension law in 1974 in significant part because he believed workers deserve a share of the wealth that they help produce. He viewed wealth sharing as a key benefit and goal of employee stock ownership.

Third, the distribution of wealth in the United States is growing more and more unequal. A large proportion of the population, including a significant percentage of working people, hold little wealth, no wealth, or have a negative net worth. One percent of households (those with at least $2.4 million in net worth) now own 40% of the nation’s wealth. A majority of all people who own any stock at all hold less than $5,000 worth of stock (including stock in retirement plans and mutual funds).

As former counsel to the Senate Finance Committee (1980 to 1987) Jeff Gates has pointed out in his recent books, The Ownership Solution: Toward a Shared Capitalism in the 21st Century (Perseus, 1998) and Democracy at Risk: Rescuing Main Street from Wall Street (Perseus, 2000), these developments have drastic implications for our economy, for our society, and even for our democracy. The statistics underscore the point that if employee stock ownership is an effective means to distribute wealth, the public and our legislators should know.

Given all this, it is surprising that so few people have researched the wealth question. For the past twenty-five years, the vast majority of research on employee stock ownership plans has centered on company performance and employee attitudes, examining the effects of ESOPs on such things as firm growth, profitability, and employee satisfaction. A number of studies have demonstrated that stock ownership combined with employee participation produces measurable performance and attitudinal effects. Most recently a large-scale study of the performance of ESOPs in closely held companies conducted by Dr.'s Douglas Kruse and Joseph Blasi of Rutgers University found that ESOPs increase sales, employment, and sales per employee by about 2.3% to 2.4% per year over what would have been expected without an ESOP. ESOP companies are also somewhat more likely to remain in business in the long term. (See

As significant as these “performance study” findings are, until the past few years there remained a large gap in the literature on employee stock ownership. With the exception of a 1991 National Center for Employee Ownership (NCEO) report which used projections from plan administration firms to estimate that an employee earning $20,000 per year should accumulate $31,000 over 10 years in a typical ESOP, no systematic studies had investigated the effects of employee stock ownership on wealth.

Two Studies

Two relatively recent studies--a 1998 study of Washington State ESOP firms and a comparison group of similar non-ESOP firms, and a smaller 2000 study of Massachusetts ESOP companies--have taken a hard look at the wealth question. Results from these studies paint an interesting picture of the wealth consequences of ESOPs.

The Washington State study (“Wealth And Income Consequences of Employee Ownership: A Comparative Study From Washington State,” Peter A. Kardas, Adria L. Scharf, Jim Keogh, 1998, The Journal of Employee Ownership Law and Finance, 10(4): 3-52--also available here) investigated how the value of retirement assets in ESOP companies compares to the value of retirement assets in other companies, and how wages in ESOP companies compare to wages in comparable non-ESOP companies.

To get at these questions, the population of 102 ESOP companies in Washington State was identified and matched with a group of control companies of the same size and industrial sector. All 601 companies--102 ESOP companies and 499 matched controls--were surveyed, producing usable responses from 37 ESOP companies matched up with 68 control companies, all of which provided detailed information on the value of assets held by all retirement plans.

The survey found that:

  • ESOP firms provide their employees significantly higher retirement wealth than similar non-ESOP firms.
  • Wages in ESOP companies are higher than in similar non-ESOP firms.

More precisely, looking just at ESOP assets, the average Washington ESOP participant's account value was worth $24,260 (1995 information). The average value of all retirement benefits in ESOP companies was $32,213. That’s much higher than the average value of $12,735 in the comparison companies.

Pension Assets Per Participant (from Survey)

ESOP Companies Comparison Companies



In terms of wages, the median ESOP company wage of $15.18 was 12% higher than the median control company wage of $13.53. ESOP wealth did not come at the cost of earnings.

The Massachusetts study (“Census of Massachusetts Companies with Employee Stock Ownership Plans,” Adria L. Scharf and Christopher Mackin, 2000) pursued a simpler research design, analyzing only ESOP assets (not total pension wealth). It did not include a comparison group of non-ESOP companies.

The Massachusetts study identified all ESOPs in the state of Massachusetts and surveyed those firms on numerous topics, including the value of assets held by their ESOP trust.

All known ESOP companies in the state were surveyed. Of those 89 ESOP companies, 60 completed the survey. Of the 60 surveyed ESOP companies, the total value of assets held by the 51 ESOP companies that disclosed trust asset values came to over $1 billion dollars (1999 information). Dividing the total wealth figure by the number of participants in the 51 ESOPs (25,633 individuals) produces a per participant wealth estimate of: $39,895.

In sum, the Massachusetts study found that:

  • The per participant wealth held for employees in Massachusetts ESOPs is $39,895.
  • Average ESOP participant holdings range from $0 to $396,000.
  • 12% of ESOPs have average participant accounts worth over $100,000.

Chart: Distribution of ESOP account values in Massachusetts ESOPs
(Percent of ESOPs)

Chart: Distribution of ESOP account values in Massachusetts ESOPs.

In light of the recent Wall Street downturn, the changed economic context should be noted. The findings reported here were based on ESOP asset values in 1995 and 1999. Because many of these companies see their price vary with the companies in the rest of the economy, it is possible that asset values have declined since these figures were reported, particularly since 1999.

One reassuring piece of information emerges from the surveys, however. The vast majority of companies with ESOPs utilize the ESOP as a supplemental or secondary pension. In Massachusetts, fifty-five (92%) of surveyed ESOP companies provide another retirement plan in addition to the ESOP.

In summary, these two studies strongly suggest that ESOPs are succeeding in fulfilling their original legislative intent. While additional confirmatory studies are needed, it appears from the research conducted to date that ESOPs are a powerful tool for sharing wealth. In Washington State the evidence was also clear that ESOP employees fare far better in terms of overall retirement assets than do employees at similar competitor firms, without sacrificing their wages. In Massachusetts, the per-participant wealth held by ESOPs represents a sum equal to the average annual paycheck in the state.

While individual account values vary by plan, by tenure, by pay-level and other factors, ESOPs secure a sizable sum of wealth on behalf of working people.

Articles & Publications