ESOPs Improve Performance in Closely Held Companies, But Results Are Mixed for Public Companies

A new NCEO issue brief on the performance effects of ESOPs reports that research consistently shows they improve performance in closely held companies but have a less clear impact in public companies. The issue brief summarizes the research on this topic over the last two decades, focusing on those studies with "before and after" designs that most effectively address a key research question: do ESOPs actually cause performance improvements or are they merely associated with such improvements?

The data on closely held companies shows, in each study, that industry-indexed performance generally goes up in the years after an ESOP is set up relative to industry-indexed performance in the years before, usually in the range of 2% to 3% per year. This change is greatly enhanced by combining ESOPs with an ownership culture that includes information sharing and employee involvement in work-level decisions. ESOPs have a neutral to negative effect when these management practices are not present; similarly, when these management practices exist absent ownership, their impact is less dramatic. The main source of competitive advantage is not the ESOP or management practices but rather the combination of the two.

In public companies, some studies show modest performance gains while others show modest declines. The differences may be a function of the time periods studied, as public companies have used ESOPs for different reasons over the years. The major use for ESOPs in public companies all along has been to help fund 401(k) plans, but in the late 1980s, many large ESOPs were set up to help fend off takeovers, while in the late 1980s and early 1990s, there were a number of large ESOPs set up in troubled trucking, airline, and steel industries. The differences may also trace to differences in methodology or just random variation. In any event, few public companies see employee ownership as an integral part of their corporate culture. By contrast, private company ESOPs have been consistently used primarily for business transition and are much more likely to be explicitly linked to a high-involvement culture.

To learn more about the report, see our issue brief on Employee Ownership and Corporate Performance.