Inštitut za ekonomsko demokracijo

ESOP history: A quick overview

Author: Elena Galevska

ESOP history: A quick overview

In a nutshell, the employee share ownership plan (ESOP) is a leveraged buyout mechanism that leads to employee ownership. Given that the employees of the company are the only group of people who have a natural self-interest in the long-term success of the company the local community and the local environment, ESOPs bring a lot of other positive effects such as:

– Decreasing negative externalities and increasing environmental sustainability by aligning the interests between owners of businesses and the local community,

– Providing disincentives for rural depopulation and brain-drain,

– Decreasing economic inequality, especially wealth inequality which occurs everywhere, even in countries where the income inequality isn’t as significant,

– Increasing productivity, crisis resilience, decreasing employee turnover, improving organizational affiliation,

– Bringing a more democratic structure to the workplace.

Quick overview of ESOP history

But how did the ESOP mechanism come to be?

The ESOP model was initially created by Louis Kelso, an American lawyer who had long held the opinion that employees are the only logical group of heirs of organizations, thus they should buy out the company they work for.

Noticing that very few people in the US owned capital, while the rest relied only on their labour for money-making, he came up with an innovative buyout mechanism based on using the future labour of workers to finance the buyout of companies, essentially making the workers capital-owners.

Becoming owners and reaping the benefits that come with ownership makes sense as they were the ones working towards the firm’s success in the past and they will continue building its future. Kelso is deemed the father of the employee share ownership plan because he was the one who generated the novel idea of getting a wider group of people into ownership and lobbied several politicians and other influential people to adopt it.

Among the most significant supporters of the ESOP model was Senator Russel Long, who greatly contributed to the wide popularity of the ESOP by including an incentive for company owners to choose the model. Namely, besides helping to pass the needed legislation and regulation, he also lobbied that the tax system allows deferral of taxes on the sale of private shares to an ESOP, making the transition more attractive.

Nowadays, ESOPs cover around 14 million workers across the United States, which is roughly 10% of the private workforce, while the number of European ESOPs is significantly lower. On this continent, employee ownership is developed mostly in Great Britain, but only after they passed an act supporting employee ownership trusts in 2014. Other European success stories can be found in Spain and Italy, where the legislation has also been adapted to the needs of the cooperative movement. This shows, among other things, the importance of the legislative framework as a success factor in ESOP creation.

That’s why the Institute for Economic Democracy has worked hard on drafting the legislative framework because having the legal rules for establishing an ESOP along with tax incentives would increase the interest and conversion of companies to ESOPs. If you want to support our purpose of passing the ESOP legislation, please feel free to contact us at: [email protected]

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