• Employee stock ownership plans have a long history in the U.S., providing workers with shares of company stock as a retirement benefit, which the company funds.
• The corporate structure is still rare across the U.S., limited to just a few industries and at smaller companies due to a variety of tax, legal and regulatory complexities and other challenges.
• But now there's a push to reimagine ESOP regulation, which proponents say would open the door to more companies offering such a program, boosting retirement savings and giving workers a bigger seat at the table.

By most metrics, employees have never been more disconnected from their work. Employee engagement in the U.S. fell to its lowest level in a decade last year, with roughly 31% of employees engaged, according to Gallup. Workers also are losing confidence in their company's future, with that sentiment falling to a record low, according to Glassdoor, leading many to either quit, or perhaps worse, stick around and do less.

Pete Stavros, co-head of global private equity at KKR, said that when he meets with CEOs and asks them how their employees are feeling, it often results in vague responses: "There's not a tremendous amount of insight," he said.

When KKR runs its own set of worker surveys across the companies in its portfolio, "The results consistently surprise CEOs to the downside. They're like 'Wow, yeah, I didn't know it was that bad.'"

Stavros has been championing a strategy that he believes can solve some of these issues, born out of his own decades of experience across hundreds of private equity deals but also his father's career journey working for a small construction company in Chicago: employee stock ownership.

"These programs can really meaningfully move the needle on culture when they're well implemented," he said. "These are outcomes that build wealth for workers, make them happier on the job, more engaged, and less likely to quit, and that's what it's done for companies."

At its most basic, the goal of employee stock ownership plans is to award all workers, not just the most senior executives, with equity in the company as part of retirement planning. Advocates like Stavros say that broadening stock ownership within corporate America can help to address several critical issues for companies but also for workers, which includes worker retention, engagement and happiness, but also wealth inequality, financial illiteracy and the broader fraying of the social fabric of society.

Stavros has led the push via KKR's deals in the industrial and manufacturing sectors, transitioning companies to shared ownership models in the process. The strategy has had some big successes, and big payouts for workers.

For example, KKR acquired CHI Overhead Doors for roughly $600 million in 2015, and in the process created a program where even hourly workers at the company received stock on top of their regular wages and benefits. When KKR sold CHI Overheard Doors to steel producer Nucor for $3 billion in 2022, CHI's employees collectively received more than $360 million as a result, with the vast majority of that going to workers below the C-suite level.

However, to date, the growth of ESOPs has been relatively stagnant, with about 250 companies each year forming as one and it largely being contained to smaller industrial companies.

Stavros said there are several reasons why, from regulatory complexity and tax issues that don't benefit larger companies, to litigation risk and a structure that appeals to companies with just a few shareholders.

However, he's placed his support behind updates to the federal law that governs employee-stock ownership plans.

"Without policy, we're not going to reach our aspirations, which are to have a transformational impact on the way companies operate," said Stavros, who added that his Expanding ESOPs coalition not only has the support of more than 50 organizations, foundations and service providers, but also bipartisan support in Washington, D.C.

The moment may not be right, Stavros said. "The government has a lot going on ... when the time is right, we'll make a big bipartisan push to try and get this law modernized."

Meanwhile, his efforts to spread the message of employee ownership continue, alongside CEOs and workers alike who praise what it's brought to their companies.

Wayne Berson, the CEO of BDO USA, said as his professional services firm was considering a variety of restructuring options in 2023 ranging from a private equity buyout to becoming an M&A buyer, the idea of how to keep workers engaged, motivated and with the firm into its future, especially amid talent shortages in accounting, kept coming up.

"We were looking at several business models, and we were looking for a business model that supported continued growth, investment and long-term stability," Berson said. "But while we were doing that analysis on our business model, we were also looking at a second issue of people."

Berson said a few numbers kept coming up, one in particular that stuck: at the nearly 6,000 ESOPs across the U.S., average staff turnover then was at 5.9%, while BDO's was at 18% (albeit less than the 39% seen across its industry).

"Any CEO is looking at the future. How do you create a sustainable business, and one that's profitable at the same time?" Berson said. "The more we looked at it, the more it became clear that if you really do care about people, this in my mind is the only way to go."

Berson said in the nearly two years since, the decision has been proven correct. The firm has lowered its turnover rate, attracted new workers because of the employee ownership strategy, and anecdotally, engagement among workers is up.

"Every firm is unique and has unique considerations, but for us, this was the only choice for our future growth based on how we feel about people," he said. Berson said his leadership team has often used the term 'We before me."

"We wanted to put it in practice; we wanted to be able to steward a thriving future for all," he said.

'It really just changed my life'

When Kevin Sims was in the process of being hired as a technician at Web Industries, a Massachusetts-based aviation and medical product manufacturer, he was told by human resources that the company was 100% owned by its employees through its ESOP structure.

At first, Sims said he didn't really understand what that meant but was happy to have a stable position after bouncing between jobs for a stretch of time. However, because of those job changes, he hadn't been able to set himself up well for retirement, something that was looming in his mind as he made his way through his 40s as a single father.

But as he started to learn more about what an ESOP was, and he started to receive statements explaining how his ownership in the company was growing, he quickly realized the benefits.

"It really just changed my life," Sims said. "It gave me this sense of confidence."

It also changed his relationship with work. Sims said in other jobs, "It was like I'm just clocking in and clocking out and getting a paycheck." But in this role, he said "I come in every day like it's my first day because that's how proud I am of what I do and what this company has offered me."

Sims said that sense of ownership is apparent among his fellow workers, who all feel like they share in the successes and challenges that the company faces, whether that's the pride he felt when Sims and his coworkers manufactured blankets that were used in space, to offering suggestions to the company about ways it could save money by being less wasteful with supplies, a strategy that was later implemented.

"The fact that I have a voice and faith in this company, it's like I got an opportunity to help us grow," he said. "I think that's really cool, and I really brainstorm on how I can make us better and our team better; the fact that they actually listen and do it and implement it, it just makes me want to do everything 10 times better in my life."

Mary Josephs, who previously led Bank of America's ESOP solutions group before founding her own ESOP advisory firm, Verit Advisors, said there have been a number of successes with ESOPs across middle market companies, but too often "it's too complicated for very small businesses and too complicated for the very large and very, very valuable businesses, so the access to ESOP is very limited relative to the economy as a whole."

At the same time, Josephs said simply implementing an ESOP doesn't guarantee anything. "The culture that needs to complement the strategy takes intention," she said.

However, she said she has seen firsthand the way that the benefits from ESOPs have empowered workers both on the job and in their personal lives. "If you come into work and you matter, and your contributions are going to help the firm and your family, you're going to go home a different person, you're going to contribute to your community differently, and that's what you see around employee ownership."

Both Josephs and Stavros say while the ESOP structure isn't going to work for every company as things stand, there are several lessons that any company can learn from ESOP successes.

Stavros said at the core, that starts with trust building, which he said, "is one of the real breakpoints today between management and workers." 

The most common way to build trust is through sharing information, and that can be accomplished through highlighting financials or just a deeper roadmap into where the company is heading. Employee surveying is an important part of that also, as well as implementing requested changes with accurate timelines.

He also encourages companies to give workers "more voice," pointing to the "Kaizen" principle practiced by Toyota, where all employees are encouraged to identify problems or potential fixes at the worksite to improve efficiency and eliminate waste.

"We've worked on more programmatic ways of giving people a feeling of control and input," Stavros said, highlighting the example of giving each manufacturing plant a million dollars a year, which workers can then "invest in any way they see fit in improving their workplace."

Stavros said there is also the opportunity for companies to embrace efforts around profit sharing and equity grants, things that can bolster retention and create more buy-in. Employee share purchase plans don't always have the same effect, he said, as they can be viewed as a trade of wages or benefits rather than being treated as a business partner.

"Conventional wisdom is only CEOs and C-suite people move the needle, they're the only ones who need ownership and we should concentrate that there," he said. "This strikes at the Achilles heel of capitalism. Every economist would say capitalism is the best way to organize an economy, but the problem, as Winston Churchill said, is the unequal sharing of the blessings," he added. "This strikes right at the heart of the problem, which is why I think it's such an important idea."