ESOPs – a Pathway to the Middle Class and Beyond

By Russell Green

It’s 7 a.m. and the southern California sun is beaming down on Mission Viejo, warming both the suburban homes around the lake and Diane Reho’s steering wheel, comforting her morning hands as she drives to the manufacturing plant where she has worked for more than 20 years. Only two and a half years remain until her 65th birthday, and retirement. “After I retire, I’m deciding whether to stay in Mission Viejo or to move to Rancho Mirage, a peaceful community just outside of Palm Springs.”

Between blue collar jobs being shipped overseas and increased automation replacing human workers by the millions, the ability of a financially independent woman to live comfortably on a manufacturing salary, and then retire in a tranquil Orange County suburban setting, is remarkable.

Diane grew up in a lower-middle class family during the 50s and 60s in a small township in Michigan, population 3,500. Her father brought home the bacon, mom was a homemaker and Diane began working part-time during her senior year in high school. Over the years she accrued 60 university credits but never completed a formal degree. Her jobs were varied, retail in the early years, then quality control inspection, and finally shipping and packaging at her current position as an inspection and packaging supervisor at  Bivar, Inc., a manufacturing company located in Irvine, Calif. that specializes in LED products.


Diane Reho, inspection and packaging supervisor, Bivar, Inc.

During her 20s and 30s, Diane wasn’t concerned with retirement, assuming that Social Security would be enough. “Now I know better!” she chuckles.

Unfortunately, Diane’s story of middle class financial stability is a rarity these days. Instead, headlines reference dire metrics of inequality, and indeed, these ominous financial trends are unsettling for the majority of Americans. This recent NYT chart is a wonderfully simple demonstration of the problem.

In spite of four decades of remarkable economic growth, hourly pay for the bottom 20 percent of households rose only 3.2 percent over this 40-year period while the overall per capita gain exceeded 140 percent.  This outcome calls into question the widespread belief that macroeconomic progress alone effectively reduces poverty by enabling a pathway to the middle class and beyond, with the fruitful realization of the American Dream.

Adding to these challenges, the hyperpolarized state of politics in Washington virtually ensures that a large-scale political fix to this problem will not soon be realized.

Yet all is not lost! As Diane’s story exemplifies, there are successful options already built into the current economic system.  Over this same 40 years, employee-owned organizations have bucked these overarching trends. Many of these are structured as employee stock ownership plans (ESOPs), and are thus qualified retirement plans under the Employee Retirement Income Security Act. These ESOP-owned organizations, such as Bivar, have helped their employee participants – many of whom are middle- or working-class laborers – receive a more equitable share of the expanding economic pie.

A recent report commissioned by the Employee-Owned S Corporations of America and written by Jared Bernstein, highlights some of these positive effects.

Exhibit 1 - S Corporations of America

figure 1Exhibit 1 compares the percentage of employee’s stock wealth (by wealth class) for ESOP participants with all stock holdings from a nationally representative data set. It is notable that the dark green bars, the distribution of stock wealth among ESOP participants, are fairly uniform, apart from a spike in highest income tier. Conversely, the lighter green bars, representing all stock wealth, are strongly skewed right with almost zero stock held by the bottom wealth class. Thus, it is evident that stock grants, the primary, tangible financial benefit of ESOP membership, are associated with a positive and significant monetary impact on employees’ lives, especially those from the bottom of the wealth distribution.

Diane credits much of her financial security to her serendipitous employment at an ESOP-owned organization. "As I got older I realized that I was running out of time to build a nest egg that was adequate for retirement, I was in my early 40's when 'the light' came on, shortly after that we became an employee-owned company. I understand that I'm very fortunate to have the opportunity to work at an employee-owned company."

Exhibit 2 - National Center for Employee Ownership

exhibit 2Current research performed by The National Center for Employee Ownership (NCEO), and headed by Nancy Weifek, Ph.D. exemplifies the positive impact employee-owned companies such as Bivar can have on workers. The NCEO’s May 15 publication analyzed the relationship between employee ownership and workers’ economic well-being, with a particular focus on younger workers aged 28 to 34.

Exhibit 2 illustrates the report’s remarkable results. Using national longitudinal surveys, sponsored by the U.S. Bureau of Labor Statistics, Weifek and team examined data from 5,504 women and men, including an oversample of African Americans and Latinos. All survey participants were periodically interviewed between 1997 and 2013. Respondents who identified as having an ESOP benefit reported 92 percent higher median household wealth, 33 percent higher income and 53 percent longer median job tenure. Across demographic sections the results were similar. For example, the median single woman earned 24 percent more than her non-employee owning counterpart, workers of color enjoyed a 29 percent higher median income, and the median single parent household received 43 percent more in wages.

The employee ownership benefits seem to be amplified when considering household wealth, particularly within historically marginalized communities. Families of color with young children had accumulated about 100 percent more wealth, $20,650 compared to $10,250, while all parents who were employee owners had amassed around 87 percent more in savings than their non-owner counterparts, $28,650 versus $15,300.

These robust data show a significant improvement in workers' financial well-being when they participate in an ESOP, a remarkably underutilized tool for lessening inequality. Policy makers, business leaders and employees should spread the word and push for more ESOP creation. As Diane aptly sums up. "If you ever have the opportunity to work in an employee-owned company, take advantage of it and make the most of it. Loyalty and hard work pay off, I'm living proof of that."


Russell Green, Rady MBA candidate 2018

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