Do ESOPs Really Increase Productivity? New Research Says Yes.

Do ESOPs actually improve company performance — or is it just theory?

In Episode 22 of ESOP Radio, Trevor Gilmore and Ben Spadt break down new research from Rutgers University showing a measurable connection between employee ownership and increased productivity. 

Drawing from large-scale Bureau of Labor Statistics data and years of ESOP company analysis, the study found that ESOPs produce meaningful productivity gains across a wide range of businesses — even when management structures differ significantly. 

Trevor and Ben walk through the key findings and explain what they mean for:

•  existing ESOP companies 
•  business owners evaluating succession options 
•  and leadership teams building long-term employee ownership cultures 

The discussion also explores why ESOPs work best alongside strong communication, transparency, and incentive structures — not as standalone retirement plans.

In This Episode

•  What the new Rutgers ESOP productivity study found 
•  Why ESOP companies showed measurable productivity gains 
•  How ownership percentage affects employee engagement 
•  Why ESOPs can work across different management styles 
•  The importance of combining ESOPs with bonus incentives 
•  How transparency and communication influence results 
•  What business owners should know before implementing an ESOP 

Key Takeaways

•  ESOPs were associated with productivity increases of nearly 7% overall 
•  Larger ownership stakes correlated with even stronger gains 
•  ESOPs performed well regardless of management sophistication 
•  Pairing ESOPs with bonus structures produced stronger outcomes 
•  Communication and transparency remain critical to long-term success

Learn more:

• ESOP Radio: https://www.menke.com/esop-radio/
• ESOP Boot Camp: https://www.menke.com/esop-boot-camp/
• Confidential feasibility review: https://www.menke.com

Transcript

Speaker: 0:03

Hi everyone, welcome to ESOP Radio. Today we have both Ben Spadt, and myself, Trevor Gilmore today. Ben, kick things off- What, have you been up to you lately? At the beginning of the month, I was in Milwaukee at the NCEO annual conference. I presented on a repurchase obligation. I also met with a bunch of great, you know, even advisors in the industry, other business partners, as well as companies that are employee owned or looking to be employee owned. It was a pretty great experience. I think there was, what, 2300 people there? That was a pretty big event for it. Braving the, the April chill in Wisconsin. Yeah, it was a little blustery one day. Yeah. Trevor, what about you? What have you been up to lately? Yeah. So I attended that same conference NCEO spoke about Esop success, what it means today, what it means in the future. Good stuff. Good questions in the audience. And also, I ran the Boston Marathon last Monday. So Monday, April 20th as Patriot's Day in Boston. And this was the 130th running of the marathon. So I did that and met my goal. It was just great. And overall it was a super epic, well-run marathon. So, so grateful to be a part of that. Absolutely. Congrats. Thanks. Next time I need to wear some, you know, ESOP swag. There you go. Yeah, I like that. Yeah. So, some exciting news out there in the ESOP universe. Rutgers, which studies ESOP's, have a think tank over there run by Joseph Blasi. And they've been doing this forever. They put out some awesome research lately that actually proves that ESOP's do increase productivity. So we've always talked about this. We see in our client base. Again, Menke has been doing this for 52 years. So we have a lot of data and a lot of conversations with our clients over that period of time. But now there's finally an official study conducted by university researchers that proves this. So let's dive in. You know, this kind of five key takeaways here for all ESOP companies. And then there's also five key takeaways for you business owners considering using an ESOP, which we'll talk about. So Ben, what are those five for ESOP companies. Yeah. First and foremost I mean, you alluded to it. ESOP's boost productivity. And it doesn't even matter about management quality. You know, you don't have to have a super strong management team in place, CFO, SEO, all of that. But we're talking, you know, a significant, materially significant increase in productivity. And, you know, you talked about this being a university study. And I think that might be painting to a brush here. This is probably the most in-depth study that has happened. You know, they talked about utilizing data from the Bureau of Labor Statistics that is, you know, you have to get a special level of clearance to access some of this data. So it's it is a big study. But like I said, you know, we're talking about a almost a 7% increase in productivity. And then the researchers even accounted for the quality of of workplaces management practices and what that means is that the Esop itself, not just being a well-run company, but the Esop itself, drives productivity. And number two, Trevor, that when you talk about how much the Esop owns matters and you want to get into that a little. Yeah, absolutely. So this study proves that the more these are bones and the greater the benefit the greater the productivity boost. So in the study here, higher Esop asset balances in the larger Esop a how about corresponded to a 25 to 27% productivity boost. That is huge pays for itself and then so on. So we're talking about real ROI here. Yeah. The larger the ownership stake that the employees have the bigger the productivity. And I alluded to this earlier, number three, that esops work across all management quality. You know, the entire spectrum where the workplace has weak or strong management practices. You know, we've seen some and we've talked about a little before on earlier podcasts implementing the iOS system in terms of management. Some of those you might consider a stronger management structure, but weaker ones still show that productivity, suggesting that esops may partially compensate for less formalized management. So it could be take, you know, company like Bob's Electric Bob makes all the decisions. The esops can, you know, increase productivity, even if we just have a single sole person making all the decisions or an entirely independent management team. And then I think, you know, the piece that is most important is pairing this with other benefits. And Trevor, you want to talk about that. Absolutely. And this is very important because the Esop is a long term retirement benefit. So it is not a current Pan set of meaning. Hey you're not going to realize this and your W-2 earnings, you're not going to get a check each year and so on from the Esop. You get a check when you either leave the company or retire, you know, or whatever that happens, right? You know? And the longer you stay and only more equity accrues to you and so on, you know, becomes a significant part of your retirement wealth. However, it is such a long term incentive. So even though it creates a huge, you know, boost for workers retirement wealth and basically how they approach their jobs, you know, studies showed there's a tremendous productivity boost associated with an Esop. Nobody over the long run esops tend to work best when they also have current pay performance incentive plans, meaning cash bonuses. If you meet certain metrics. We also see stock appreciation rights plans, you know, and so on. But combining a current bonus structure that's based on some sort of measure, if that makes sense for the business, for the group of employees in the division and so on, combined with the Esop work best and you're going to get the highest ROI because then people are going to see, hey, I work hard, smart and so on, and I'm going to get that bonus this year and I'm going to see that correspond to a higher value on my Esop account statement. So marrying the two makes tremendous sense. And the companies in the study and again we're talking about thousands of companies in the study. And they measured the data for I think over 15 years. So it's meaningful data here. The productivity boost was about 13%, you know, for those companies or if I'm about real synergies here. Absolutely. And I think yeah, the the the now and later kind of mentality I get a little bit of a bonus now. But a big bonus later that really seems to grease the wheels a pretty well. But even those individuals and this leads into number five, even those individuals that perhaps aren't motivated by the Esop. We talk about, you know, we have drivers on these construction companies that are thinking about fuel costs. Those are the people that are truly drinking the Kool-Aid, truly buying in the ones that aren't, and the ones that sort of just show up and do their job. You know, the Esop isn't incentivizing them to work harder or increase the bottom line. They call that the free rider problem. It seems to be manageable or smaller with esops that it is easier to get employees to buy in with the overall vision of the company if they're sharing in the success, whether it be in the Esop or with the Esop. And a bonus, but it does seem to be minimized with an Esop structure. And so, you know, those are the five bullet points that we talked about, about from the business owners perspective, what those takeaways are from this study. But what about owners considering an Esop. Yes I mean it's five key takeaways. So for business owners listening to this you know that's a lot of our audience here is business owners considering their exit options. Whether it's Esop whether it's on a private equity side, her strategic competitor, you know, you name it, or even existing a management. So the case for the Esop here in terms of productivity is number one the productivity case is real. You know there's real data here showing there's a corresponding productivity boost. If you go Esop go other options. There's not much data show on that. Right. So this is a proven way to increase productivity. Next up is you should not remove your bonus structure because you have the Esop that might go the other way and work against you. So keep the existing bonus pay structure in place. And we always recommend to our clients that that would be very unusual circumstances that let's say Halo to reduce people's pay because of the Esop. Right. Because I tend to send the wrong message. And if I could chime in, Trevor, you know, the last few is outfit analysis analyzes that we've done have included that bonus structure. And our business owners that are considering Esops. Their first question is, do I need to get rid of my bonus, or can I keep this bonus in place because it's important to not only me, but to my employees? So we are seeing that a lot and we are advising them not to take that away or not to modify it because it is important. It goes hand in hand with Esop and the employee ownership. Exactly. Yeah. It's employees want to know. They get used to obviously a certain wage level, certain bonus level, you know, and so on. And when you start stripping that away, you know, the messaging changes, and replacing especially with a very much a long term benefit, it's like, hey, you know, you're swap in something for something that it's going to be way far out. So that message doesn't resonate with a lot of employees and the and the overall incentive for productivity gains, kind of, you know, goes away. So it takes more try to keep the bonuses in overall cash comp structure still more. And I think that yeah, Trevor I think that teases into the next one too about how transparency matters. You know, this is the third takeaway for business owners considering and Esop you know, be transparent. And we're not talking about, you know, open up the books to everybody but share information. Hey we're considering an Isa. Or are just cluing these regular frontline workers into what these key performance indicators are, your metrics that you use to determine profitability, health of the company and it that independently will improve productivity because people see how they fit in with that math. And as the Esop structure is designed, as you go through our different phases, we will show you and kind of clue you in how to build that culture, how to roll it out to the employees and keep them involved with it without, you know, giving away how the sausage is made, so to speak. Absolutely. Transparency matters. Focus on the right metrics that are relevant for your business, not vanity metrics. You know that's crucial. The right metrics that employees will understand, care about, and want to outperform. Next up is a larger ownership stake per employee tends to drive a stronger effect. And we said this earlier today as well. So companies that tend to have 100% Esop ownership, they're going to see higher productivity boosts that a company with 1% ownership. You know, as you know, overall, the effect of working hard, seeing that, return ROI. And then of course, the power of 7 million, investment growing at 7% a year is going to double for ten years. You know, the power of compounding that gets smaller at a 1% stake. You know, when we take a look at the whole, value multiplier and so on over time, definitely larger stakes tend to drive higher productivity gains. But that's not to say there's an option. You start off small and then increase that stake over time. You know, we see that with a lot of businesses who want to test the waters first before committing. Yeah. And we we model that out, you know, 30 versus 49% or 49 versus 100. You know, if you don't want to give up control now, but say perhaps in five years, seven years, you don't you want to sell 100%. We can model out what those different looks. Are like and how much benefit we are giving to the employees. And then I teased on this a little bit earlier with existing esops. But number five here for if you're considering an Esop, is that your management structure isn't. You know, having a good strong management structure isn't a prerequisite for an Isa. I would say to make an ideal Esop candidate, having a strong management team is, a plus a bonus, but it's not required. And if you have a less formalized management structure and Esop could still be a good fit. And it's not like we have a playbook that shows. Here's exactly what you do. Here are the instructions for an Esop. If you've seen one Esop, you've only seen one Esop. You haven't seen them all. They come in every shape and size. Absolutely. And that's kind of a surprising takeaway here. But I think the overall theme is whatever the management structure is, every business can be different or company size and history, you know, so on. Make sure that you have clear performance targets and also commit to regular communication with employees before and after the Esop transition. And that's going to strengthen the overall outcome, solidify the productivity gains we're talking about today and make for an overall successful Esop, successful company and successful employee ownership experience. So everyone, thanks for joining us today. Hop on our website MENKE.COM. We have a link to the study available there. Also reach us out to us on LinkedIn Trevor Gilmore, Ben Spadt, you can find us also many pages as well. We post a lot about Esop companies, everything from the capital raise to transition to the tax benefits, to awesome long term case studies as well. Have a great day! Join us for our next episode.