16 July 2009

The History of the ESOP

To the question, “Why does the United States have ESOPs?” it is not an exaggeration to say the answer is that a guy in California thought they were a good idea, and he personally persuaded a member of the Louisiana congressional delegation that he was right.

From here.

Ideas have a power all their own.

An ESOP is an employee stock ownership plan established in accordance with safe harbor provisions of the federal tax code and ERISA (the Employee Retirement Income Security Act of 1974, which is the principal federal employee benefits law and is best known for its broad pre-emption of state law in the area). Typical, employer stock is held in a trust, tax free, for the benefit of employees who are plan participants, on a tax favored basis. Generally, an ESOP transfers economic benefits (and risks) to workers, without ceding control of the business.

One of the better lay treatments of ESOPs including their history can be found in several articles regarding "ESOPs and the Financing of Worker Cooperatives" in "Worker Cooperatives in America" edited by Robert Jackall and Henry M. Levin (1984).

The indirect ownership ESOP model bears considerable resemblence to the system used in the Mondragon industrial cooperatives, in Basque Spain, probably the largest community of worker owned large businesses in the capitalist world, that was established in the 1950s, which included about 85 worker cooperatives employing about 18,000 workers in 1984.

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