ESOPs Help Reduce Wealth Inequality
ESOPs are helping to narrow the wealth inequality gap, according to a new Aspen Institute report that draws on multiple studies funded by the Employee Ownership Foundation, and an October 2020 roundtable discussion featuring researchers, philanthropic leaders, investors, policy experts, and others.
That is the good news. The more sobering news is that a lot of work remains to be done to close the wealth inequality gap—even among ESOP companies.
ESOPs Spread the Wealth
It has been well documented that women, people of color, and Latinx individuals struggle to amass as much wealth as others. For example, one 2016 study cited in the Aspen Institute report showed that only 41% of Black families had a retirement account, compared to 68% of white families.
Another study from the same year showed that median white family wealth was $147,000, compared to $6,660 for Latinx families and $3,600 for Black families. Further, research shows, 60% of families of color would fall below the federal poverty level if they lost their main source of income.
In contrast, employee owners participating in an ESOP receive far more equitable compensation.
One study cited in the report compared the wealth of employee owners at a group of ESOP companies to national averages. It found that employee owners earning low- and moderate-incomes had ESOP accounts with a median value of $165,000—far outpacing the typical median American household, which had only $17,000 in savings.
Employee owners who were closer to retirement fared even better: Of the low- and moderate-income employee owners surveyed, those ages 60 to 64 had 10 times more wealth than the typical American in the same age group.
While ESOPs have not closed the wealth inequality gap, the study makes clear that they are narrowing it significantly.
Not Enough of a Good Thing
ESOPs are especially good for individuals in historically disadvantaged groups, but not enough of these individuals are getting the chance to reap the benefits of being employee owners.
For example, women are vastly underrepresented in our community. Among ESOP employee owners, only 37% are women.
And while Latinx workers make up 13% of the U.S. population in the General Social Survey (GSS), they comprise only 9% of all ESOP employee owners.
The good news: Black employees are slightly overrepresented in ESOPs, comprising 16% of all ESOP employee owners and 14% of the U.S. population in the GSS.
The conclusion here is clear: ESOPs are good for all of these individuals, we simply need more of them to participate as employee owners.
We Can Do More
The study suggests the following three ways to expand employee ownership and increase equity.
Increase awareness of ESOPs and broaden efforts to reach a wider audience. The report notes that employee ownership is not well understood among policy makers and the public.
Roundtable participants suggested targeting messages about the benefits of employee ownership to businesses (including those that might expand their existing ratio of employee ownership), investors, business advisors, and policy makers. They also suggested reaching business owners and employees of color through trusted community groups, such as religious organizations, community action agencies, and worker centers.
These messages could be customized to show key groups how they can benefit from employee ownership.
Increase access to equity and risk capital. The report examines several options for making capital available to businesses that might make employee ownership available to a broader segment of the population. Some of the options discussed include crowdfunding, examining and addressing current shortfalls in employee ownership funding, and working with investors and lenders that seek to address wealth equity for businesses at risk of closing.
Implement policy solutions across all levels of government. The report suggests implementing policy solutions at the local, state, and federal levels to raise awareness and build capacity among groups that support employee ownership, provide new sources of financing, and offer new incentives. Some of the options mentioned include:
- Creating or funding state or local employee ownership centers.
- Providing training on how to run and own an employee-owned business.
- Using layoff aversion funds to support employee ownership feasibility studies.
- Deploying Community Development Block Grant funds for small business education and outreach focused on employee ownership.
- In municipalities, implementing strategic and technical assistance to prepare businesses owned by people of color in federally designated Opportunity Zones to convert to employee ownership.
Closing and eventually eliminating the wealth inequality gap is the right thing for our nation and is perfectly aligned with the spirit of employee ownership, where everyone shares in the rewards. As members of the ESOP community, we have the unique ability to make an enormous difference by expanding what we already do—providing fair and equitable opportunities to share the wealth with those who help create it.