One way to close the wealth gap: make employees part owners

Building wealth in the U.S. today is difficult–especially for people of color. Over the last 30 years, adjusted for inflation, the average wealth of white households rose by 33% (buoyed by the fact that almost all of the wealthiest Americans are white), while the average wealth of black families in the U.S. dropped by half. Hispanic and black women earn, on average, just about half of what men do, and face multiple systemic barriers to building wealth.

Income stagnation, which has persisted for the last several decades, certainly plays a role: Workers have seen very little growth to their take-home pay, as top executives’ salaries have ballooned, and companies return dividends to shareholders. The fact that companies are more beholden to shareholders than to employees has been cited as a main driver of pervasive inequality in the U.S.

Employee ownership, according to a new report from the Rutgers Institute for the Study of Employee Ownership and Profit Sharing, could help reverse this trend. The Rutgers teams looked particularly at Employee Stock Ownership Plans. ESOPs, as they’re often called, is the most widespread employee ownership model in the U.S.: There are nearly 7,000 plans, involving nearly 14 million workers. They’re generally simpler to set up than more comprehensive employee ownership models, like worker cooperatives, where all employees collectively own the company and each has a vote in corporate decision-making. ESOPs, by contrast, can be implemented by traditionally structured companies.

To form an ESOP, a company establishes a separate trust that purchases a percentage of its stock and holds it in employees’ retirement accounts. Typically, companies use credit to purchase the stock and subsequently repay the loan. “That’s the key–[employees] don’t have to buy the stock with their savings or retirement, or pay back the loan themselves,” says Rutgers professor Joseph Blasi, who directs the Institute for the Study of Employee Ownership and Profit Sharing. For employers, ESOPs have been linked with higher retention rates and increased worker productivity, which improves the company’s performance overall.

Because ESOPs both directly feed into employees’ retirement savings–which workers often struggle to build–and grant employees some measure of ownership stake in the company, the Rutgers researchers wanted to test if the plans could help frequently marginalized workers, like low-earners, women, and people of color, build wealth and assets. “What we do not know from prior studies is if and how employee ownership benefits the least skilled, or undervalued earners,” the report authors write.

The Rutgers team found that ESOPs do benefit marginalized workers by enabling them to build assets outside of their income, which they then can draw on to support their livelihoods more broadly. The research team surveyed nearly 200 employee-owners, the majority of whom earned less than the median household income of $61,372, at 21 companies across the U.S. that offer ESOPs. Around 72% had been at their companies for at least 15 years–62% were women, and 48% were people of color.

For low-wealth and low-income families, the impact of an ESOP was particularly notable. Families earning less than $34,848 that participated in ESOPs had an average employee ownership stake of nearly $8,000. In terms of wealth, which includes cash savings, inheritance, and goods owned, families with low wealth (less than $8,800) reported an average ESOP value of nearly $2,000, or 26.5% of their overall wealth. For families of color, and those headed up by a single mother, the average dollar value of ESOPs was generally lower, but constituted a more significant percent of their overall family wealth, suggesting that “employee ownership can provide a significant wealth accumulation effect for all, and in particular for low-income individuals and families,” the report authors write.

ESOPs, the Rutgers team notes, should not be a replacement for higher wages, especially for marginalized workers. But through their research, they also found that ESOPs correlate with higher pay: Employee-owners of color earned, on average, 30% more than non-employee-owners, and low-income women who were employee-owners saw, on average, 24% higher pay than their non-employee-owner counterparts.

The Rutgers researchers heard from employee-owners they interviewed that ESOPs granted them a higher level of security around providing for their family and building wealth now, and retiring in the future. Many employee-owners who have reached either the age or tenure at the company where they can draw from their ESOP have done so to pay for college tuition, a down payment on a home, or to transfer wealth to their children–something that is quite common in the upper 10% of earners, but rare among families of color and low-earning households. “One of the important things about looking at asset-building opportunities of employee ownership is not just looking at financial account growth, but understanding how assets are built in a number of different ways that support economic security for the workforce and thereby their families,” says Janet Boguslaw, a research fellow at Rutgers and a senior scientist at Brandeis University who worked on the report.

For retirement, ESOPs can level the playing field for women and workers of color. Under more mainstream retirement plans like a 401(k), women and people of color make contributions as often as white men do, but because their earnings are lower, they accumulate less wealth. ESOPs are tied to shares in the company, not individual earnings, so workers across the company have an opportunity to accumulate more shares the longer they remain, regardless of demographics.

“Women and people of color in the ESOPs studied here are faring much better than women and people of color nationally in building wealth,” the study authors write. “This suggests that employee ownership is an important policy strategy that can reverse some of the national wealth gaps.”