How successful are companies with Employee Stock Ownership Plans (ESOPs) in getting an increased share of the nation's wealth and income into the hands of employees? Using three sources – 1995 wage and employment data from the Washington State Employment Security Department, survey data, and data from federal income tax form 5500 – we researched this question for Washington State companies. The 5500 data as well as records kept by the Washington State Employee Ownership Program enabled us to identify 102 ESOPs in the state, which we then randomly matched to 499 comparison companies. This resulted in an average of five comparison firms per ESOP company.

In terms of size and industrial sector, the Washington State ESOPs are fairly representative of other ESOPs in the country, except that there is a smaller percentage of companies in Washington with over 500 employees. Data from the 47 ESOPs that returned surveys indicate majority ownership of the stock by the ESOP in 15 companies (39%), with four of the ESOPs owning 100% of the company. Average percentage of stock ownership by the ESOPs was 42% and the median was 35%. Eighty-three percent of the ESOP companies were privately held.

The surveys, sent to both ESOP and comparison companies, asked for detailed information about a number of things, including the value of assets held by retirement plans, the number of employees in different wage categories covered by each benefit plan, whether the company was unionized, company age, types of participatory management techniques used, degree of employee influence in various decision-making areas, and, in the case of ESOPs, percentage of company stock held in the ESOP trust and percentage of payroll contributed to the plan in 1995. Survey responses by ESOP and comparison companies enabled us to match 37 ESOPs with 68 control companies. We were able to supplement the survey data with data from the 5500 forms, from which we were able to match 66 ESOPs with 136 comparison companies.

In comparing ESOPs to the matched comparison companies on benefits and income, we examine first the value of retirement assets, including company stock. Because both ESOP and comparison companies often have more than one retirement plan (e.g., 401(k) and profit sharing plans), we need to measure benefits in a way that pulls together the value per participant of each company plan. We also need to take into account the fact that between 60% and 70% of comparison firms have no retirement plan at all, at least according to survey results and data from the 5500 forms.

Table 1 presents average assets per covered employee for ESOP companies and matched controls that returned surveys. The top row gives the sum of the average assets per participant for all plans listed in rows two through six (401(k) plan, ESOP, etc.). This measure assumes that a participant in one plan is also a participant in every other plan, so the sum equals the total value of an individual’s assets from all the different plans. These numbers indicate that the sum of the average value of assets per participant is significantly higher in the ESOP companies ($32,213) than in the controls ($12,735).

The composition of the numbers differs significantly as well. For the typical ESOP participant, the ESOP represents 75% of the combined asset value of his or her retirement accounts. Of the 75% that the ESOP holds, about 80% is probably in company stock (typically 20% of ESOP stock is diversified, according to the National Center for Employee Ownership), meaning that 60% (.75 × .80 = .60) of the ESOP participant’s retirement assets are in company stock. Of the remaining value in the typical ESOP participant’s retirement accounts, 12% is from 401(k) assets, 4% from defined benefit assets, and 2% from profit sharing plans. In the control companies, 70% of the value of the assets is from 401(k) plans, while 3% is from defined benefit plans and 11% from profit sharing plans. So while the typical value of the ESOP company retirement assets is approximately $20,000 higher per participant than found in the control companies, the ESOP investment is heavily concentrated in the stock of the employing company and thus carries more risk. On the other hand, the diversified portion of the ESOP participant’s retirement assets (40% of $32,000 = $12,800) is almost identical to the total assets of non-ESOP participants ($12,735).

What do these per-participant assets mean to employees at different wage levels? For those companies that allocate stock to employee accounts either on the basis of payroll or payroll to a cap (and 83% of the companies use one or the other of these methods), we can calculate numbers representing assets per participant in different wage categories. The average asset value of $32,213 translates into $18,200 for employees in the $10 - $14 an hour range, and into $62,744 for employees in the $20 to $40 an hour range. At 5.5% interest with the principle declining to zero after 20 years, the employee in the $10 - $14 an hour bracket would receive approximately $125 a month, while the employee in the $20 to $40 an hour bracket would receive approximately $432 a month. By contrast, 70% of the monthly income for a full-time worker in the $10–$14 per hour bracket would be approximately $1,456 (before taxes). For employer funded defined benefit pension plans, the rule has traditionally been that a covered employee could count on 70% of the last three years’ salary as a retirement benefit.

The average value of $32,213 is based on the current value of the assets. If the company continues to make contributions to company stock or to other retirement plans, and/or the value of the stock increases, the value of the assets will increase. It is therefore of interest to know how much of payroll the company is putting into retirement assets on an ongoing annual basis. The percentages in Graph 1 are derived by dividing a company’s total compensation for 1995 (data from the Employment Security Department’s database) into the amount the company reported contributing to the different plans for that year (data from the survey of companies). ESOP companies in 1995 contributed 10.8% of payroll to all plans, while the control companies contributed 2.8%. The end result of these levels of contribution, if continued annually, would be ESOP company employees seeing the value of their retirement assets increase at three to four times the rate of comparison companies due to the increased rate of company investment alone, all other things (e.g. relative stock values) being equal.

None of the independent variables in the analysis eliminated or significantly diminished the ESOP as an explanation for higher asset values. ESOP companies had higher valued assets in all industrial sectors (at least when utilizing Form 5500 data), and neither large company size nor older plan start dates were associated with higher asset values. Unionized ESOP companies had lower asset values than non-union ESOP companies, though unionized comparison companies had higher asset values than non-union comparisons. The data were ambiguous on the effect of majority ownership within ESOPs and on the effect of workplace participation programs in both ESOP and comparison companies.

Given that the value of retirement benefits is significantly higher in ESOP than in comparison companies, do employees at ESOP firms typically take lower wages to make purchase of company stock possible? The simple comparison of means summarized in Graph 2 suggests otherwise. The results show that ESOP companies pay both higher average as well as higher median wages than do comparison firms. The average ESOP company wage of $19.09 is 12% higher than the average control company wage of $17, and the median ESOP company wage of $14.72 is 8% higher than the median control company wage of $13.58. At the 10th percentile, wages in the ESOP companies are 4% higher than in the controls. At the 90th percentile, ESOP wages are 18% higher than comparison wages, causing the ratio of 90th to 10th percentile wages to be 11% higher in ESOP companies.

From these numbers it would appear that Washington State ESOP companies typically pay higher wages, so employees at the middle of the pay scale are better off in terms of take-home pay working in an ESOP company than in a comparable conventional company. On the other hand, workers at the bottom of the pay scale in ESOP companies do not make much more than comparable workers in competing companies, and there is a greater distance between those at the bottom of the wage scale and those at the top than in conventional companies.

What happens to these results when we control for other factors, such as unionization, industrial sector, workplace participation, majority ownership, and company size? Graph 3 shows the impact of unionization on both ESOP and comparison companies. Unions have the effect of raising the median wage as well as the wage at the 10th percentile, while wages at the 90th percentile are lower in unionized ESOP and comparison firms. In terms of worker participation, we expected to see an association between greater use of participatory practices and either higher wages or higher stock values. This is because previous research projects had found a link between greater commitment to worker participation and higher company growth rates. However, in this study we found no discernable differences in wage levels between the more participatory and the less participatory firms. Likewise, the median wage for majority owned ESOPs is lower than the median wage for minority owned ESOPs, though both majority owned and minority owned ESOP firms have higher wages than the comparison firms in their own industrial sector. There is a slightly negative correlation between employment size and median pay, meaning that there is a tendency for smaller firms to have better pay than larger firms. Finally, in every industry classification but one, the median wage for ESOP firms is higher than the wage for comparison firms.

As for other non-wage compensation and benefits, the ESOP companies for which we have data paid out more in 1995 for stock options, cash bonuses, etc., than did the comparison companies. The overall average for ESOP companies was $1688, and for comparison companies $323. In terms of paid leave, insurance, and health benefits, ESOP companies were more likely to provide all of those benefits to all employees, with both ESOP firms and comparison companies financing approximately 95% of the cost of health benefits for those employees covered by health plans.

The sum of all these findings is that, on average, the ESOP firms in this study provide a significantly higher total compensation to their employees than do their competitors. However, the increased inequality within non-union ESOP firms (represented by the ratio of 90th to 10th percentile wages) suggests that ESOP companies are not establishing new standards for compensation equality within the firm. Rather, they are operating well within the framework of rewards already established in the economy. It is important to note that, within that framework, they do provide a majority of the ESOP employees a retirement benefit in the form of company stock, whereas a majority of the comparison companies provide no retirement benefit at all (although the benefits that are provided probably entail less risk than the stock held by ESOPs).

Peter Kardas is a consultant and free-lance researcher working with ESOPs, worker co-operatives, and trade unions. Adria Scharf is a doctoral student at the University of Washington, concentrating on organizational sociology and the sociology of work. She has a particular research interest in employee ownership. Jim Keogh is a business retention specialist for the Washington State Department of Community, Trade, and Economic Development. He managed the agency's Employee Ownership Program for nine years.