ESOP: Employee ownership of companies on the rise

"When it comes down to crunchtime, we're a team," says Susan Becker, a receptionist at King Arthur Flour, which was owned by the same family from 1790 to 1996, when the Norwich, Vt., company's owners began transitioning ownership to their employees. In 13 years, the ESOP has gone from a five-employee concern selling to a niche New England market to a 160-employee venture with an expanded product line on supermarket shelves in 50 states, plus a thriving catalog business, store, and baking school. Key to its success is the energized workforce.

"The way I see it, I'm working for Harriet – she's a packer downstairs who will be retiring soon," says P.J. Hamel, a 20-year veteran of the company. "I want her to get a good retirement."

A cost-cutter at every desk

It's not just that employees work harder. They also contribute original ideas and cost-saving solutions at the job level. "When you start to accumulate a lot of ideas, the amount of money generated is huge," Mr. Rosen says. "And it's not a copyable thing that a competitor can do cheaper."

Forming an ESOP not only increases sales and boosts employment, it also causes sales per employee to rise some 2.3 percent a year over what the company's pre-ESOP performance would have predicted, according to a 2000 study by Douglas Kruse and Joseph Blasi of Rutgers University. The study compared the performance of 343 pairs of closely held ESOP and non-ESOP companies. Over a 10-year period, that would make the ESOP company a third larger than its paired non-ESOP match. Other research confirms that employee ownership – when combined with a participative management culture, and especially where the majority of employees are owners – results in substantial gains.

ESOP tax breaks unfair?

Not everyone's sold on the idea. Norman Stein, a professor at the University of Alabama School of Law, objects to the generous tax benefits ESOPs receive. He also says they present too much risk to employees, who may "lose their jobs as well as their retirement savings in one stroke."

Many ESOPs, however, offer 401(k)s rather than pensions, allowing employees to stash retirement funds in other companies. To Bob Graybill, president of FMS, an ESOP is a safer retirement plan in today's economy than a 401(k): "You don't have to put any of your own money into the [ESOP], and you're in control of your own destiny, instead of throwing money into a public company that's making decisions you have no control over."

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