A Short History of the ESOP

Adapted from An Introduction to ESOPs

The employee stock ownership plan (ESOP) concept was developed in the 1950s by lawyer and investment banker Louis Kelso, who argued that the capitalist system would be stronger if all workers, not just a few stockholders, could share in owning capital-producing assets. However, few companies took up Kelso's ideas because an ESOP's authority to borrow money to buy stock for participants was based on IRS rulings and had no clear statutory authorization.

In 1973, Kelso convinced Senator Russell Long, chairman of the tax-writing Senate Finance Committee, that tax benefits for ESOPs should be permitted and encouraged under employee benefit law. Soon, federal legislation promoting ESOPs appeared, most importantly the Employee Retirement Income Security Act of 1974 (ERISA), which governs employee benefit plans and established a statutory framework for ESOPs. In the following years, the number of ESOPs expanded dramatically now that sharing ownership was in the economic self-interest of company owners. From time to time since then, Congress has modified the laws governing ESOPs, most notably in the Tax Reform Acts of 1984 and 1986, the Small Business Job Protection Act of 1996, the Taxpayer Relief Act of 1997, and the Economic Growth and Tax Relief Reconciliation Act of 2001.

There are now about 11,000 ESOPs and similar plans (stock bonus plans) covering over 8.5 million employees. ESOPs are found in publicly traded and closely held companies of every size; however, most such companies have over 15 or so employees due to the costs of setting up and administering an ESOP.

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