ESOPs

[rogerashton]

Clinton has addressed income inequality by calling for more incentives for profit-sharing. ESOPs (Employee Stock Ownership Programs) have also been mentioned, though it appears that actually comes from the Center for American Progress. (I believe that is a "third-way" group, but not sure.)

http://money.cnn.com/2015/07/13/pf/hillary-clinton-profit-sharing/

An ESOP is a plan that essentially uses a share of profits to buy stock that is then held in trust for the employees. They are also regulated so that the benefits are widely spread among the whole work force of the company, unlike some profit-sharing and bonus schemes. While I don't believe that goes far enough, ESOPs have a good record of success.

http://www.nceo.org/articles/esop-employee-stock-ownership-plan

https://www.nceo.org/articles/esops-profit-sharing-stock-bonus-plans

ESOPs also have some roots in populism, in a sense -- Senator Russell Long, the son of Huey Long who advocated "sharing the wealth," was the key legislator who got the ESOPs into law. Huey is often called a "populist," though he called himself a progressive. Russell Long said

His father had been a “Robin Hood” populist, he said. He himself wasn’t a Robin Hood populist, but he liked the idea of more people becoming capitalists.

http://www.retoolingcapitalism.com/2014/10/louis-kelso-invented-esop/

I don't quite buy this as a remedy for wealth inequality, but it is not a bad idea. I would like to see Clinton speak to it directly, and see Bernie and perhaps other candidates respond. The details can be a little difficult, but most political types who have understood the idea seem to think it could be very salable -- perhaps a good move for Clinton to bring it to the forefront of the argument.

[JaneyVee]

1. More here:

http://correctrecord.org/hillary-clinton-a-fair-and-free-economy/

[rogerashton]

5. I didn't find anything there about ESOPs or profit sharing. eom

[TexasTowelie]

2. I wouldn't exactly call it profit sharing since it could easily be misused to finance the company's

poor budget discipline.

I had an amount withheld from my paycheck to purchase stock and the company that I worked for made a matching contribution. The benefits that I received are that I lowered my net taxable income and I was fortunate that I managed to buy stock at a relatively low price and the price increased significantly, particularly from the contributions that I made earlier in the process. I did well for the four years I held the stock after paying the taxes once I sold it. If you are relatively close to retirement it may also make more sense since most likely your net income will decrease once you are in retirement.

If anyone gets involved with an ESOP, make certain that you monitor that not only you receive your contribution from the company, but that the company purchases shares with both your contribution and their own. There are some companies that withhold payment to their employees and are not purchasing shares as expected. In essence they are stealing their employees wages to finance their haphazard budgets. Also do not invest any more into the company stock than you can afford to lose since the entire investment (both your share and the company's share) may vanish if the company tanks. Unless you have a firm belief that the company's profitability is going to increase in the future (I would say within a 3-5 year time horizon), or the company match is significantly better than its 401k match then it is probably better diversify your investments.

[canoeist52]

3. Thanks for this - it would make a much-needed educational OP.

[rogerashton]

7. An ESOP can also be used as a "poison pill"

Since the trustee votes the shares held in the ESOP, and the trustee usually is an executive of the employing firm, the ESOP can discourage a hostile takeover. Judge for yourself whether that is good or bad.

Much of the abuse arises from the fact that trustees are not generally independent of the employer. Instead, the trustees should be elected by the employees in the plan, one employee one vote. But then it would begin to look a bit like codetermination or a workers' cooperative. I suspect that is a bit too radical for the Senator.

[awoke_in_2003]

4. ESOPs are a joke

to make workers think they might actually share in some of the profits of the company

[Recursion]

6. I've been in an ESOP that paid decent dividends

Actually I still have the shares lying around my brokerage account somewhere, now that I think of it.

ESOPs without a dividend are just a baseball card collection, though.

[awoke_in_2003]

9. I guess I cynical

After 27 years of working for companies that have them, and (very) occasionally being tossed a bone with a tiny bit of meat on it

[rogerashton]

8. I agree that they do not go far enough

but the evidence does not support the extreme position of "awake in 2003." In my view, of course.

[TexasTowelie]

10. Have you heard of Enron?

Thousands of employees lost their retirement savings with that debacle. Remember that when you participate in an ESOP that you are giving your employer an interest free loan without a guaranteed rate of return for yourself and that you could lose the principal on that loan.

I'm of the old school who believes that you should be loyal to your employer; however, I also was burned by employers that did not return that loyalty. Are you going to be willing to leave money invested in the company if you are terminated? If you are not willing to leave the money are your prepared to take a loss?

I chose to devote a small percentage of my salary at one time to an ESOP because I read the annual reports of the company and saw an opportunity because that company was a counter-party to AIG on a derivatives contract. It was very apparent that the real estate market (for both residential and commercial properties) was over-inflated and it was a balloon ready to pop. If I had not received a company match in the ESOP I would have lost money in the plan since the stock price declined from $140/share to $90/share (which was actually good since I acquired more shares during that time based on the fixed amount taken from my paycheck). It took until the third year for my investments to begin to pay off and a year later when the company captured most of the value of those derivative contracts I sold my shares of the stock at $275/share about three months before the stock leveled out at a new plateau.

Unless you are willing to thoroughly review the financial reports of a company to see the possibility of an exponential windfall and have the acumen to weigh the risks, I would not consider an ESOP plan as a shrewd investment for money that I would be counting upon during retirement unless there is tremendous upside potential in the relative short term (a few years at most). I was (and am) nowhere near the age of retirement so I could be more aggressive with my investment strategy and wait for what I knew what would inevitably occur in the real estate market.

[rogerashton]

12. Was the Enron plan an ESOP? I think it was a 401K.

Nevertheless, you have a point. For those who have a choice, it is better to diversify your retirement fund, and given that you are "investing your human capital" in the employer, the right position in your employer's stock is zero.

However, this isn't really a question of financial management. The representation -- right or wrong! -- is that the "profit sharing" or ESOP contribution would be over above wages, not a deduction from them.

My own preference would be for a sovereign wealth fund, with holdings diversified across the economy, and funded by a wealth tax. However, I don't think any candidate is proposing that, even Bernie, and this post was in the general discussion -- primaries thread.

[TexasTowelie]

13. Enron was a 401k program.

If the program is truly a stock give away program that doesn't require a match from the employee then you don't have any "skin in the game" so I don't see anything wrong with taking that risk. However, if you being asked to contribute or if you are required to either defer salary or future pay raises, or if it means that the company will reduce its matching contribution to a 401k program then it becomes murkier.

I doubt that any proposal from any of the candidates is going to be absent of risk though. I don't see why any company would be willing to give up the governance of its operations and it also creates a conflict of interest having to be responsible to both its employees and its stockholders.

[rogerashton]

14. As I understand it, this is put forward as a response to the growing inequality of wealth.

That's consistent with the ideas of Louis Kelso, who originated the idea.

I think the reasoning is that

1) The stock stake increases the commitment of the employees to the company,

2) This increases productivity,

3) This increases profits,

4) That pays for the stock stake.

OK, laid out that way, it sounds a bit like "supply side economics," i.e. "voodoo economics." But there is some evidence that companies with ESOPS are more profitable than those without, other things equal. (There is also a lot of evidence that productivity is higher in worker coops, and in companies that grant employees some sayso in management, than in comparable profit-seeking companies.) Win-win outcomes do occur in the real world.

I don't see why any company would be willing to give up the governance of its operations and it also creates a conflict of interest having to be responsible to both its employees and its stockholders.

Recall that the stock is voted by trustees, who usually are the employers, so loss of control does not usually occur, but just the contrary. Yes, I have argued that the employees ought to elect the trustees. That would be something like Mitbestimmung, codetermination, which is required for large corporations in Germany.

https://en.wikipedia.org/wiki/Codetermination_in_Germany

And Germany is eating everybody's lunch so far as competitiveness is concerned.

Now, I'm not saying I am committed to ESOPs. I'm not. I would like to see criticisms of them from the left. (I have some of my own; see above.) But it would be interesting and worthwhile if it became a live issue in the campaign.

[artislife]

11. Who else want ESOP's?

Wall Street. It feeds the machine.

[Cheese Sandwich]

15. I think ESOPs are a mixed bag.

There are some great ones and some lousy one. As a general idea it has potential but we would have to ask what makes an ESOP work well instead of lousy.