S Corporation ESOPs Perform Better During a Recession

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Thu, Mar 25, 2010
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A press release announced a new study, RESILIENCE AND RETIREMENT SECURITY: Performance of S-ESOP Firms in the Recession, that found that S Corporation ESOPs outperformed their non-ESOP counterparts during the recent recession in job creation, revenue growth, and providing higher wages and retirement security:

A study of a cross-section of Subchapter S firms with an Employee Stock Ownership Plan shows that S-ESOP companies performed better in 2008 compared to non-S-ESOP firms along a number of dimensions, including job creation, revenue growth, and providing for workers' retirement security. The S-ESOPs paid their workers higher wages on average than other firms in the same industries, contributed more to their workers' retirement security, and—crucially in a year of recession—hired workers when the overall U.S. economy was pitched downward and non-S-ESOP employers were cutting jobs.

S-ESOPs help prepare ESOP participants – the workers – for a more economically secure retirement. Employee-owners accumulate shares of company stock as part of their compensation in addition to their wages and other benefits such as health insurance. This is a meaningful contrast between S-ESOPs and other firms: nearly 60 percent of working Americans do not have any assets in a work-related retirement plan and half of American workers do not even have access to an employer-sponsored retirement savings plan. S-ESOP firms play an important role in contributing to their employee-owners' retirement security—an ownership stake in their employer is a form of diversification compared to workers who otherwise rely on government retirement plans such as Social Security. Further diversification is achieved for workers as they near retirement, as ESOP retirement plans are mandated to provide asset diversification for workers aged 55 and older. In addition, previous studies have found that 80 percent of S-ESOP firms offer workers retirement savings plans in addition to the ESOP—and many of these firms make employer contributions to workers' retirement savings in these plans.

These findings are derived by comparing data from a survey of S-ESOP companies that are members of the Employee-Owned S Corporations of America (ESCA) with data on both national averages and data specific to the same industries as the surveyed S-ESOP firms.

Here is the text of the press release:

Washington, DC (March 23, 2010) – A Georgetown University/McDonough School of Business study released today found that, in the most recent economic recession, Subchapter S companies owned by their employees through employee stock ownership plans (ESOPs) demonstrated considerable resilience and performed better than other companies in providing for workers' retirement security, job creation, and revenue growth.

Economists Phillip Swagel and Robert Carroll reviewed the performance of a cross-section of S corporation ESOP companies in 2008, and found that the S corporation ESOP ("S-ESOP") structure, created by Congress to promote the retirement savings and other benefits of employee-ownership, has provided considerable benefits not only to workers but also to the national economy. "Our results indicate the resilience of S-ESOP firms during the first year of the recession. S-ESOPs hired and grew their businesses when other firms were shrinking. This is in addition to the desirable feature of the S-ESOP business model that provides considerable resources for employee-owners' retirement security," said Swagel.

Swagel, a visiting professor with Georgetown's McDonough School, was Assistant Secretary of the Treasury for Tax Policy from Dec. 2006 – Jan. 2009; he also served as Chief of Staff at the White House Council of Economic Advisers during the Clinton Administration. Carroll, now an Executive-in-Residence with the American University and co-founder of American University's Center for Public Finance Research, was Deputy Assistant Secretary for Tax Analysis from Nov. 2003 - Jan. 2008, and prior to that was a senior economist at the President's Council of Economic Advisers.

In their study, Swagel and Carroll found that S-ESOPs give their workers a more secure retirement by providing substantial retirement savings for employee-owners, in this case at a time when most other companies did not. Surveyed S-ESOP companies increased contributions to retirement benefits for employees by 18.6%, while other U.S. companies increased their contributions to employee retirement accounts by only 2.8%, or one-sixth that amount.

The study's authors also reported that, while overall U.S. private employment in 2008 fell by 2.8%, employment in surveyed S–ESOP companies rose by nearly 2 percent. Comparisons between S-ESOPs and non-S-ESOPs in the manufacturing sector were even more favorable: surveyed S ESOP manufacturers lost no ground where employment was concerned, while their non-S-ESOP counterparts shed about 6 percent of their jobs. Wages in all S ESOP companies during the period grew by 5.9%, while overall U.S. earnings per worker grew only half that much.

"These results tell us what workers in S corporation ESOP companies already know," said Mark Lewis, president of Woodfold, Inc., in Forest Grove, Oregon. "When times are tough, employee-owners work smarter and harder because of their commitment and investment in the business and this makes us stronger." Lewis currently serves as chairman of the board of directors of the Employee-Owned S Corporations of America.

Representatives Ron Kind (D-Wis.) and Earl Blumenauer, co-authors of the S Corporation Promotion & Expansion Act (H.R. 3586), applauded the study's results. "With fewer than half of Americans claiming any form of employer-sponsored retirement savings plan, these S-ESOP companies are providing real retirement security for their workers," said Rep. Kind. Blumenauer added, "I have seen the power and the pride of employee ownership firsthand in Oregon. It makes sense that employees with a stake in the companies they work for are faring better during the recession. As a member of Congress, I am committed to helping extend this opportunity to more hard-working Americans." Kind and Blumenauer's bill, co-sponsored by a bipartisan group of a dozen other House Members, would enable the creation of more employee-ownership in U.S. companies in every sector.

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Topics: Studies and Statistics, ESOP Benefits, ESOP, employee stock ownership plan

Aaron Juckett, CPA, CPC, QPA, QKA
Written by Aaron Juckett, CPA, CPC, QPA, QKA

Aaron is President and Founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

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