For centuries inventors have tried to create perpetual motion machines — devices that would run endlessly unless stopped by an outside force. The first recorded attempt by Robert Fludd was the water screw. Unfortunately, it didn’t work. Almost 400 years have passed with countless attempts but no one has produced a viable working example.
While the scientific world has yet to perfect the perpetual motion of physical objects many companies have found a perpetual motion machine of sorts for their business in the form of an Employee Stock Ownership Plan (ESOP).
Refresher: What is an ESOP?
An ESOP is a qualified defined contribution retirement plan that is invested primarily in the stock of the sponsoring company. ESOPs have many advantages. They can assist with a company’s ownership succession, help owners create liquidity to diversify their investment portfolios, and help employees be better prepared for retirement. An ESOP provides the business owner with a great deal of control over the timing and extent of the sale.
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ESOPs can also help a company perform better. The ESOP aligns the goals of the employees with those of the company through ownership. This alignment creates a loop of continual positive reinforcement that creates the perpetual motion. As the company grows, employees are rewarded more so employees work harder and the company grows more. The cycle is summarized in the following diagram:
Employee owners are more productive
It is intuitive to think that employees with an ownership position are more productive than those without. After all, the more productive they are the better the company performs and therefore the greater the financial benefit to them.
A recent survey supports this belief. Seventy-six percent of respondents indicated that their ESOP positively affected the overall productivity of employees, according to The Employee Ownership Foundation’s 21st Annual Economic Survey of ESOP Companies.
More productive employees drive higher profits
Companies invest significant resources to increase employee productivity. They hire consultants, upgrade technology and train their staff to make them more productive. Their motivation is simple: More productive employees drive higher profits.
Most companies with employee stock ownership plans are privately held so detailed information about profits is generally not available. However, insight as to firm performance can be seen through employment levels. A recent study found that although overall U.S. private employment in 2008 fell by 2.8 percent, employment in the surveyed S-ESOP companies rose by approximately 2 percent. It is unlikely that these firms would have hired additional staff unless profits remained strong.