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One study on ESOPs found that company sales, employment, and productivity grew more than 2 percent faster per year than would have been anticipated before the ESOP was introduced. Beyond productivity and employee retention, a hallmark of employee-owned and cooperative enterprises is business longevity. A 2005 study found that 100 percent of employee-owned companies in the United States were roughly two-thirds less likely to fail when compared with all public companies.
Growing worker-ownership also has significant implications for our broader economy as it helps address two looming catastrophes:
1. The Business Succession Crisis: Over the next decade, thousands of businesses will be sold or shut down, as millions of baby-boomer owners retire.
2. The Retirement Savings Crisis: As many as nine in ten households save too little to finance retirement, and millions of Americans have saved nothing at all.
Worker-ownership can help to address both situations: Locally-owned businesses do not have to move or close. Many can be sold to their workers, which keeps the business, jobs, and wealth local.
These benefits have led to considerable growth in worker-owned companies over recent decades. In 1975, workers owned about 1,600 companies in the United States. Today, roughly 14 million employees in 7,000 companies own some share of their business through an employee stock ownership plan or ESOP. Another 7,000 people are employed at 300 plus worker cooperatives, with $400 million a year in revenues. Many of these successful worker-owned companies are contributing to the vitality of Philadelphia’s economy. Childspace Daycare Center, a Keystone STARS top rated childcare center, has been operating in Philadelphia for 30 years and now has 60 employee-owners.
Despite growth trends, significant barriers to worker ownership remain. If these businesses are ever going to be meaningful participants in our regional economy, capital access must be addressed. Loans can be difficult to secure. Mainstream lenders are reluctant to lend to these businesses because the model is not well understood, and accountability is perceived as too diffuse. Some community development financial institutions will lend to worker-owned companies in underserved markets, but the borrower must meet high standards to qualify.
These challenges have prompted municipalities to provide assistance for the development of worker-owned companies. In 2014, the New York City Council allocated $1.2 million to support cooperative development; that funding was nearly doubled to $2.1 million in 2015. And in the largest allocation by a U.S. city to date, Madison, Wisconsin will invest $1 million a year for five years beginning this year to build capacity for organizations that provide technical assistance and lending to cooperative businesses.
Will Philly be next? City Council held a public hearing on cooperative development in late October. So stay tuned!
need to know about this emerging policy
For small businesses, where employees often work long hours and are earning more than $455 per week, the proposed rule could be significant. If multiple employees are routinely working beyond normal work hours, overtime pay could reasonably increase personnel expenses.