History of Employee Ownership (ESOPs)

History of Employee Ownership (ESOPs)

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Employee stock ownership
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Employee stock ownership has its origins in the industrialization of the American economy around the middle of the 19th century. During this period, major American companies like Procter & Gamble, Railway Express, and Sears & Roebuck started to set aside stock in the company to give to employees when they retired.
Employee Ownership an alternative source of income
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It was an innovative solution to what was then a relatively novel problem: how to support someone who had worked for a major industrial company for over 20 years. Ownership of company stocks provided these retired workers with an alternative source of income.  
This solution was successful enough that when the U.S. implemented the income tax under Woodrow Wilson’s administration in 1913, one of the biggest debates was over the question of how to treat stock employers had set aside for employees.
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Tasking a lawyer to transfer ownership to the workers
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In 1956, an economist and lawyer by the name of Louis Kelso(1) | #Louis Kelso | were tasked with an unusual and interesting case: he needed to develop a succession plan for a newspaper company, Peninsula Newspapers, Inc., that would transfer ownership to the workers.
Lawyer idea
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Peninsula Newspapers was owned by its two founders, both of whom were in their 80s. Their aspiration had long been to turn the ownership of the company over to the managers and employees, in order to prevent a large newspaper chain from purchasing the company and laying off people.
The employees did not have the money to buy the company, but Kelso had an idea: they could use the company’s tax-qualified profit-sharing plan to make a down payment, risking the loss of employee retirement funds for the chance of employee ownership.
Kelso’s second idea was to use the company’s profit-sharing plan to borrow the money to cover payments on the bank loan to maintain ownership and repay interest and principal from the contributions the company had been continually making to the plan. And so, the first ESOP was born.
Kelso went on to father several other ESOPs, but the creation of each new ESOP required to review and approval by the IRS National Office until a new ruling in 1964, which required only that the plan and trust documents be submitted for review by the appropriate regional office.
ESOPs tax benefits have been under threat
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The tax advantages of ESOPs(2) | #ESOPs | were threatened with the introduction of the Employee Retirement Income Security Act (ERISA) in 1973, but Kelso himself persuaded Senator Russell Long (D-LA), chairman of the Senate Finance Committee, of the merits of ESOPs. An enthusiastic convert, Senator Long ensured the preservation of tax advantages for ESOPs when the bill passed into law in 1974.  
Today ESOPs are flourishing, with 6,669 different plans covering a combined total of 14.4 million people.
Lexicon
Louis Kelso website | http://kelsoinstitute.org/louiskelso/kelso-paradigm/who-what-and-why/ |
ESOPs(2) | http://www.esopmarketplace.com/esop-history.html | 
  
 

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