Employee ownership, the wealth gap, and the current crisis

Sen. Ron Johnson (R-Wis.), one of the most conservative members of Congress, and Rep. Alexandria Ocasio-Cortez (D-N.Y.), one of the most liberal, have both introduced sweeping proposals to broaden employee ownership in the U.S. That surprising fact testifies to just how practical—and urgent—this idea is.

Too many Americans have too little wealth. Just over 20 percent of all Americans have no wealth at all. Forty percent of Americans cannot cover a financial emergency with available cash, forcing them to need to borrow money, put it on a credit card, raid their retirement accounts (if they have one), or other less than optimal choices. Only about half the working age population has retirement savings of any kind. The racial disparities are even starker. The net worth of a typical white family is nearly ten times greater than that of a Black family. About 60 percent of white families have retirement accounts; 30 percent of Black families do. The median ownership of stock by white families is nearly eight times as high as Black families. Housing equity is about 2.5 times greater among white than Black families. While the differences are less stark for Hispanic families, the disparities remain very large.

This lack of access to wealth is economically, socially, and psychologically devastating. Wealth means options; wealth means security; wealth means we can plan for the future. With wealth, we can send our kids to college, take a chance on a new job or starting a business, handle an emergency, and much more.

The uncomfortable reality is that these self-perpetuating disparities in wealth are based in large measure on policy decisions made by governments and businesses at all levels, whether racial exclusion programs, tax incentives captured mostly by the very rich, subsidized loans to businesses, zoning requirements, outlandishly large equity grants to top executives, and much more. The current economic and health crisis is disproportionately affecting people with low wealth, even threatening their very lives.

There are many proposed solutions to the wealth gap, from universal grants at birth, to sovereign wealth funds that pay dividends to citizens (such as the Alaska Permanent Fund), to universal basic income. Whatever their merit, these proposals will face substantial political obstacles.  One way to address this issue is already in place, however, and could have a profound impact with steps that would have bipartisan support: broad-based employee ownership through employee stock ownership plans (ESOPs). About 14 million Americans are in these plans, which hold about $1.4 trillion in equity. Because of the way these plans are structured, they are inherently more equitable than almost any other government incentive for wealth building, such as 401(k) plans, federal housing loans and tax incentives for home ownership, small business loans, tax incentives for corporations, and many, many more that benefit mainly white, wealthier people.

An ESOP is a company funded employee benefit plan that creates ownership accounts in employer stock for all employees based on their relative pay up to a maximum level (some companies have even more level formulas than this). Unlike a 401(k) plan, how much you get does not depend on how much you put in, a system favoring the better off with more discretionary income. ESOPs are almost always add-ons to other retirement plans. Participants in these plans accumulate 2.2 times the retirement assets of employees in other retirement plans and literally infinitely more than the roughly half the non-government working population that has no retirement plan at all.

In 2017, Nancy Wiefek of the National Center for Employee Ownership, using data on millenials from the National Longitudinal Survey of the Bureaus of the Census, found that the median household net wealth among respondents in employee ownership plans was 92 percent higher for employee-owners than for non-employee-owners; employee-owners of color have 79 percent greater net household wealth. The employee owners also had higher wages and greater job stability.

A study by scholars affiliated with a project at Rutgers University in 2019 found that “employee stock ownership plans (ESOPs) enable families to significantly increase their assets, shrinking—though not eliminating—gender and racial wealth gaps.” The study found ESOP companies helped employees gain a better understanding not just of corporate financial issues—most ESOPs have some form of open book management—but also personal financial planning. Many companies offered employees an increased voice in how their work was organized, providing a level of personal agency lacking in most jobs.

ESOP companies are not just some social experiment, however. They grow 2.2 times faster than would have been expected, lay people off at a rate less than one-third that of other companies, and, notably in these times, recover faster from recessions. Congress has provided substantial tax benefits for ESOPs, always on a virtually unanimous bipartisan basis.

For all that, there are still only about 6,700 ESOPs. The incentives now focus mostly on closely held companies, and few busines owners even know an ESOP is an option. Federal and state programs to provide education on ESOPs could go a long way to creating more plans at very little cost. ESOPs owned primarily by people of color cannot qualify for set-aside programs because the mechanism through which ownership occurs (an employee ownership trust) is not considered a minority individual. Public companies focus their ownership sharing lavishly on executives, lacking the incentives or mindset to share ownership widely. Broader ownership in these companies requires a new set of incentives as well as linking federal tax or direct assistance to sharing ownership broadly.

There are bills now before Congress that seek to increase employee ownership dramatically—and they illustrate how bipartisan this issue is. S. 4263, introduced by Sen. Jonson would provide grants of up to $20,000 per employee for companies qualifying for the Payroll Protection Program to make investments for growth—provided employees got at least that much in stock through an ESOP. In the House, Rep. Ocasio-Cortez introduced HR 6851, which would require public companies who get federal economic aid to provide broad-based employee ownership to their employees. It’s not likely these two people agree on much other than employee ownership. It is not clear if either bill has a serious chance to pass, but these are inklings of a growing acceptance that employee ownership is a fairer way to run the economy. It is an idea that progressives and conservatives need to put front and center.

Corey Rosen is Founder of the National Center for Employee Ownership.