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Why are Employee-Owned Companies So Much Better With Retention?

Posted by Corey F. Schechter | Apr 26, 2018 | 0 Comments

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Employee-owned companies have shown increased productivity and performance, according to recent surveys. However, employee-ownership is also associated with higher rates of employee retention. Some companies undervalue the cost-savings of higher employee retention rates when considering whether to convert to an employee-owned model for their business.

According to a survey by the Rutgers University NJ/NY Center for Employee Ownership, workers at employee-owned companies are:

  • Less likely to look for other jobs; and
  • More likely to take action when co-workers are not working well.

An Employee Stock Ownership Plan (ESOP) is a qualified retirement plan that investments primarily in employer securities. The ESOP operates as a tax-exempt employee stock ownership trust. Employee participants acquire an ownership interest in the company as a benefit of working for the company which they can cash out on retirement.

The benefits of high retention are more obvious for some companies over others. The cost to train a new employee can be high, depending on the job and industry. This includes advertising, recruiting, interviewing, training, and increased initial supervision. Even experienced workers need time to get up to speed with a novel system.

Especially frustrating for growing companies looking for new talent is the high turnover rate of new employees. In high-demand tech and engineering positions, an employer can spend lots of time and money recruiting a new worker only to have that employee leave within weeks of being hired, using the employer's offer as a stepping stone to a higher paying job.

Start-ups can be especially hard-hit by high turnover. Start-up companies have limited time and money to get to a point of profitability and viability. Employees leaving the growing company can stall progress and cost the new business time and money that they don't have.

Employers may not only have a hard time replacing new employees but long-time employees can be just as difficult to replace. Employees with unique skills or experience may simply be irreplaceable. This includes workers who have been with the company for decades and understand why things are done the way they are, or workers with a unique personality that allows them to connect with customers.

All of these factors make it advantageous for companies to retain good workers in the face of competing offers. Employers may have a limited arsenal of incentives to offer employees to stay with the company. The most obvious incentive is increased pay. However, employers may have limited payroll resources and some employees are motivated by more than just money.

The benefit of employee-ownership is that it offers employees a stake in the success in the company. This gives employees an ownership interest that continues month-to-month and year-to-year. Because of the continuing increase in retirement benefits of an ESOP, the longer an employee stays with the company, the greater their incentive to stay with the company.

The combination of employee empowerment and shared capitalism is a strong force in reducing voluntary turnover and increasing employee productivity. Employee ownership without a financial share in the company's success does not lead to the same results.

If you have any questions about the benefits of an ESOP for your company, the law firm of Butterfield Schechter LLP is here to help. We are San Diego County's largest law firm focusing its law practice on employee benefits law and ESOPs. Contact our office today with any questions on how we can help you and your business succeed.

About the Author

Corey F. Schechter

Corey Schechter practices in the areas of Employee Benefits, Employee Stock Ownership Plans, Pension and Profit Sharing Plans, ERISA, ERISA Litigation, Business Law, Qualified Domestic Relations Orders (QDROs), and Employment and Labor Law.

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