ESOPs: An Historical Perspective
The creation of the Employee Stock Ownership Plan (ESOP) is usually credited to Louis Kelso, a San Francisco economist. Mr. Kelso was a prolific writer and a passionate believer in the benefits of expanding the ownership of a business to its employees.
However, Mr. Kelso was not the first person to perceive the benefits of employee ownership. In 1916, Sears Roebuck and Co. decided to fund its pension plan primarily with company stock. The concept was that the employees’ ownership of Sears stock was a good retirement benefit for them and, at the same time, an excellent way to motivate employees to improve the company’s profitability and thus its value.
In the early 1970s, Mr. Kelso’s enthusiasm for employee ownership caught the eye of Senator Russell Long of Louisiana, then chairman of the Senate Finance Committee, and the concept of employee ownership gained an ally and momentum.
Also in the early 1970s, many successful small to medium-sized private companies faced a common problem: how to plan for succession upon the death or retirement of the business owner. After a lifetime of work, business owners and company employees were faced with the possibility of having little to show for their endeavors. Business owners clamored for a better alternative.
Concurrently, American business was increasingly confronted with new competitive threats from many fronts, most notably, growing foreign competition. American business was looking for answers.
In 1974, with the sponsorship of Senator Russell Long, the concept of employee ownership in the form of a tax-qualified retirement plan was formally recognized by federal law when Congress enacted the Employee Retirement Income Security Act of 1974 (ERISA). In general, ERISA established certain rules and guidelines for establishing and administering employee benefit plans. In particular, ERISA established the ESOP as a type of tax-qualified retirement plan. To promote employee ownership, substantial ESOP tax advantages were created. Thus, it became public policy to encourage employee ownership.
Tax incentives to encourage employee ownership have been enhanced and modified by the Economic Recovery Tax Act of 1981, the Tax Reform Acts of 1984 and 1986, and most recently by the Small Business Job Protection Act of 1996 and the Taxpayers Relief Act of 1997.
The federal government’s commitment to ESOPs and their incentives has been relatively unwavering since 1974.
Reprinted with permission of Houlihan, Lokey, Howard, & Zukin.