Wealth and Income Consequences of Employee
Ownership: A Comparative Study from Washington State
Peter A. Kardas
Adria L. Scharf
Jim Keogh
The authors wish to thank the
Ford Foundation, Richard Freeman from the National Bureau of Economic Research,
and Chris Mackin of Ownership Associates for funding this research. The authors
also thank Janelle Edwards and Nick Lee from the Washington State Department of
Community, Trade, and Economic Development for their careful work with data
input and for other assistance they provided to the project. A special thanks
also to Douglas Kruse for his comments and questions on an earlier draft of the
paper, and for his excellent summary of the paper at the Shared Capitalism
Conference in Washington, DC, May 22 and 23, 1998.
In addition to being involved in occasional research projects,
Peter Kardas works with unions, workers, and businesses in Washington State on
economic development, employee ownership, and worker participation projects.
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, and managed the agency's Employee Ownership Program
for nine years..
This
study attempts to answer questions about the success of companies with employee
stock ownership plans (ESOPs) in getting more wealth and income into the hands of
employees. . Using 1995 employment and
wage data from the Washington State Employment Security Department and 1995
data on retirement benefits from a survey of companies and from IRS Form 5500,
the study matched up 102 ESOP companies with
499 comparison companies in terms of industrial classification and employment
size. The data allowed the
authors to estimate the value of retirement assets in ESOP companies compared
to the value of retirement assets in other companies; to compare ESOP and control companies in
terms of wages and other benefits (such as health care and other insurance);
and to analyze whether the distribution of wealth and wages is more egalitarian
in ESOP companies. Independent variables included company size, industrial sector, unionization,
percentage of ownership by the ESOP, age of the retirement plan, and company
participation programs.
This study By comparing retirement assets and
wages in Washington State
ESOP companies with those
in
matched
similar
non-ESOP firms,
the attempts
analysis shows The study foundthat ESOP companies provide significantly higher retirement benefits than comparison firms. T the average value (per
participant) of all retirement benefits
in ESOP companies (in 1995) wasequal to approximately
$32,000,, with an whereas the average value in the
comparison companies was of about $12,500.
None of the independent variables in the analysis eliminated or
significantly diminished the ESOP as an explanation for higher asset values. A large percentage
of comparison companies (between 58% and 71%) had no retirement plan at all,
and for in those that did, employee participation rates in
the plans were lower than than in the ESOP companies. Further, About 60% of the
retirement assets in ESOP companies was in the form of company
stock, while in those comparison companies that have plans, approximately 70%
of the value of the assets was in stock offered through 401k plans. Ccompanies with ESOPs contributed on average about
10% of pay to all retirement plans,
while the comparison companies contributed on average about three percent. Whereas in those
comparison companies that have retirement plans, approximately 70% of the value
of the assets was in stock offered through 401k plans (and presumably diversified), whereas in ESOP companies about 60% of retirement assets
take the form of company stock .
In terms of wages,The company stock held in the ESOP does not appear to come at the cost of wages.
Tthe median hourly wage of $14.72 in the ESOP firms
was 8% higher than
the median hourly wage in the comparison companies. At the 10th percentile of wages, hourly wages were 4% higher
in the ESOP firms, while at the 90th percentile, ESOP wages were 18% higher than in the comparison
firms. Therefore, the ratio between the 90th and 10th percentiles was higher in the ESOP companies
than in the comparison firms. Unions,
in both ESOP and control companies, had the effect of raising wages at the 10th
percentile and lowering them at the 90th, with the result that median wages for unionized control companiess are significantly higher than for non-union
controls. On average, the ESOP firms in
this study provide a significantly higher total compensation to their employees
than do their competitors,, though but the ratio of 90th
to 10th percentile wages suggests that they do so withinthey do so withinreplicate the framework of rewards already established in
the economy.
In
writings during the 1950s and 19’60s,
Louis Kelso argued that ownership by employees of company stock is necessary to
create a society in which affluence is broadly shared and extremes of economicy inequality of wealth and
poverty reducedreduced. If the ultimate goal of employee
stock ownership is to achieve a society that has both greater greater equality of
economic condition as well as equality of opportunity for economic gain, broad capital ownership equality
of economic condition as well as equality of
opportunity for economic gain, without sacrificing employee wages, then it may be of
interest to examine the distribution of
wealth and income wages distribution
in companies that have established employee stock ownership plans
(ESOPs) using the tax incentives that Kelso helped inspire. Nearly 24 years
after the establishment of ERISA, have ESOPs lived up to their promise to more broadly share the gains of stock
ownership?redistribute wealth? What are the financial benefits
of ESOPs to company employees and to ESOP participants? Scott--Maybe
it's just my interpretation of Kelso, but it seems to me that he's arguing for greater
equality of economic condition and
greater equality of opportunity for gain, which of course is not the same thing
as arguing for absolute
equality. In Two Factor Theory he
writes that the economic objective of universal capitalism ". . .is the
production and enjoyment of the highest level of affluence (humanly useful
goods and services) for every family, consistent with optimum use of the
economy's resources and productive power, and the desire of its people to consume.
. . ." (p. 8). One of the
political objectives of universal capitalism is the "broad diffusion of
privately owned economic power."
That sounds like an interest in greater equality of economic condition,
an interpretation that is reinforced by a statement on page 11 that "any
society seriously caring about freedom must structure its economic institutions
so as to widely diffuse economic power while keeping it in the hands of
individual citizens," and another
statement on page 121 that "every individual's human dignity requires that
he enjoy general affluence, and that he produce it." Your rephrasings don't capture the moral and
political intent that I see in his writings, so I request that our original
formulation remain. Scott, you wrote: It may seem a quibble, but Kelso was not
primarily interested in equality per se—communism did that, he’d note; rather,
he was interested in greater wealth for more people. In his radical moments,
he’d say that having more money than you or your heirs could consume was theft,
but he probably didn’t believe that (his widow has more than she and her heirs
can consume). Perhaps you should say “If the ultimate goal of employee
ownership was a broader distribution of substantive capital ownership” or “a
society in which everyone could participate substantively in capital
ownership.” Also, Kelso never opine
d
about income distribution within companies, did he?
The study reported here begins to address these questions with data on wages and retirement plan assets in Washington State companies. We combine government wage data on ESOP companies and comparison companies with retirement plan information from a survey of those companies and from Internal Revenue Service (IRS) Form 5500 filings to estimate:
· How the value of retirement assets in ESOP companies compares to the value of retirement assets in other companies;
· How wages in ESOP companies compare to wages in comparable non-ESOP companies;
· How ESOP and control companies compare on the provision of other benefits, such as health care insurance; and
· Whether the distribution of wealth and wages is more egalitarian in the ESOP companies.
In addition, we investigate the effects of a number of independent variables, including company size, industrial sector, percentage of ownership by the ESOP, years that the plan has been in place, unionization, and company participation programs.
The sample of 102 ESOP companies includes nearly every such company in Washington State that we were able to identify. We used Form 5500 data and records from the Washington State Employee Ownership Program to generate a list of all definite and potential ESOP companies in the state. We then made phone calls to those companies to confirm whether they have an ESOP or a KSOP (i.e., a combined 401(k) plan and ESOP).[1]
The 499 control companies were selected by random match. For each employee stock ownership company confirmed to have an ESOP, three to seven control companies of the same employment size and industrial sector (based on the four-digit Standard Industrial Classification [SIC] code) were randomly selected from a database of all companies in the state provided by the Washington State Employment Security Department. All but three ESOP companies were matched with between three and seven controls. For three ESOP companies, there were only two possible comparison companies of the same sector available. This resulted in an average number of control companies per ESOP company of five.
|
Company
Size in 1995 (Number
of Employees
per Company) |
Count |
Percentage (of
Sample) |
ESOPs nationwide[4] |
|||
|
|
ESOP |
Non-ESOP |
ESOP |
Non-ESOP |
|
|
|
1–49 |
38 |
244 |
37% |
49% |
34% |
|
|
50–99 |
16 |
101 |
16% |
20% |
19% |
|
|
100–199 |
23 |
58 |
23% |
12% |
16% |
|
|
200–299 |
3 |
26 |
3% |
5% |
14% (200 – 500 employees) |
|
|
300–399 |
5 |
13 |
5% |
3% |
||
|
400+ |
9 |
21 |
9% |
4% |
||
|
Missing |
8 |
36 |
8% |
7% |
17 % (500+ employees) |
|
|
Total |
102 |
499 |
100 |
100 |
|
|
Table 2. Industrial
Sector
|
Industrial
Category (SIC
Code) |
Count
|
Percentage (of sample) |
ESOPS
nation-wide[5] |
||
|
|
ESOP |
Non-ESOP |
ESOP |
Non-ESOP |
|
|
SIC1: Forestry, Fishing, Mining, Construction |
10 |
58 |
10% |
12% |
11% |
|
SIC 2: Manufacturing (food, lumber, printing, chemicals) |
9 |
47 |
9% |
9% |
25% (SIC 2 & 3) |
|
SIC 3: Manufacturing (metal, industrial machinery, transportation equipment) |
20 |
108 |
20% |
22% |
|
|
SIC4: Transport, Communications, Utilities |
2 |
6 |
2% |
1% |
4% |
|
SIC 5: Wholesale and Retail Trade |
24 |
127 |
24% |
26% |
19% |
|
SIC 6: Finance, Insurance, Real Estate |
23 |
78 |
23% |
16% |
22% |
|
SIC 7: Services (taxable companies) |
7 |
40 |
7% |
8% |
18% (SIC 7 & 8) |
|
SIC 8: Services (health, legal, social, engineering) |
7 |
35 |
7% |
7% |
|
|
Total |
102 |
499 |
100% |
100% |
99% |
We sent surveys to all 601 companies and made follow-up phone calls to 400 of those, obtaining usable responses from 148 companies—47 companies with ESOPs and 101 comparison companies (see the appendix for a copy of the survey). Out of these usable responses, we were able to match up 37 ESOPs with 68 control companies. From survey respondents we have detailed information on the value of assets held by retirement plans, the formula by which benefit assets are allocated to employees, and the number of employees in different wage categories covered by each benefit plan. In addition, survey respondents were asked the value of salary and non-salary compensation for highly compensated employees who are not covered by unemployment insurance, whether the company is public or private, whether its employees are covered by a collective bargaining agreement, the company’s age, the types of participatory management techniques used, and the degree of employee influence in various decision-making areas. For ESOP companies, the survey asked for information about the ESOP plan, including the percentage of company stock held in the ESOP trust, the percentage of payroll contributed to the plan in 1995, the basis on which stock is allocated to employee accounts, whether the plan was leveraged, and the reason(s) the ESOP was implemented.
According to survey data from ESOP companies that provided this information, the percentage of company stock owned by the ESOP trust in 1995 ranged from 0% to 100% (as summarized in table 3).[6] Of those, the ESOP owned a majority of the stock in 15 companies (39%), with four of those ESOPs owning 100% of the stock. The average percentage of ownership by the stock plans was 42% and the median was 35%. Seven ESOPs for which we had this information were publicly traded, and 35 were privately held. Four comparison companies were publicly traded, and 93 were privately held.
Table 3. Distribution
of ESOP Companies by Percentage of Company Stock Held by ESOP Trust
|
Percentage of Stock Held by ESOP Trust |
Count |
Percentage (of ESOP Companies for Which % of
Ownership Is Known) |
|
0-24% |
13 |
33% |
|
25-49% |
11 |
28% |
|
50-74% |
8 |
21% |
|
75-100% |
7 |
18% |
|
T |