The History of ESOPs

Employee ownership is not a new idea. The earliest reference to employee ownership in the US came from William Meredith, secretary of the Treasury under President Zachary Taylor. In 1849, he observed that workers were owners in many enterprises and believed the idea would be a great way to foster a common interest between labor and capital. In the late 1800s, the Knights of Labor, one of the US's first unions, created several worker-owned businesses. In the 1920s, leading industrialists called for a "new capitalism" based on employee ownership. Employees were encouraged to buy shares in their own companies, and more than one million employees did so. Unfortunately, none of these efforts endured, and the idea faded away until the 1950s.

It was then that Louis Kelso, a San Francisco-based investment banker and lawyer, created the modern ESOP. In The Capitalist Manifesto, a bestselling book written with the philosopher Mortimer Adler (a household name at the time), Kelso and Adler argued that capital investment in new machinery and technology would drive workers into lower-paying jobs, or even out of work completely. Historically, when investments in machinery and technology increased, workers became more productive and were paid higher wages. However, Kelso and Adler believed that the pace of change in the next generation would be so rapid that it would render many well-paying jobs permanently obsolete. People who own capital will do very well indeed; those who work for them will struggle to maintain their position. So the solution, they argued, must be for more employees to be owners. Along these lines, Kelso's wife and collaborator Patricia Hetter Kelso argued in a 2017 lecture that when the means of production change, the means of distribution of wealth needs to change as well, a notion that has become more relevant today as AI begins to create another upheaval in the structure of work and the ownership of productive assets.

Kelso's predictions have proven true. Inflation-adjusted wages have remained relatively stagnant since ESOPs were enacted into law in 1974, but as of 2025, an investment in the stock market has grown by about 3,800% in inflation-adjusted dollars during that time. Most employed people say that they are living paycheck-to-paycheck or worse. Almost half of the private sector workforce does not participate in a retirement plan, almost half of both working-age Americans and all Americans have no retirement savings, and many people who do have a retirement plan have not saved enough for a secure retirement. The problem, Kelso and Adler said, was that not enough people owned capital. It was true then and even more true now.

Most employees could not afford to purchase their workplaces, so a way had to be found for them to become owners. But how?

ESOPs to the Rescue

Kelso envisioned a solution. He proposed laws that would give everyone a chance to own capital that could produce income. He called this plan an employee stock ownership plan (ESOP).

Rich individuals and wealthy companies can acquire companies by borrowing money. Already having money, these groups could persuade lenders that they would generate sufficient profits from the company they purchased to repay the loan.

How, then, could normal employees buy ownership in their own company? With wages stagnant and consumption costs rising, setting aside money to buy stock was not practical for all but a few. If they approached a bank as a group and asked for a loan to buy all or part of the company, bankers would politely laugh. Kelso's solution was to have the company borrow money on behalf of the employees. The company, not the employees, would take the risk if the loan could not be repaid. The ownership of the capital acquired by the loan would be contributed to employees in the form of company stock. In return, companies could get a tax deduction for buying the shares for employees, paying for part of the cost. The remaining cost, the argument went, could be made up by workers being more productive because they were now owners.

Kelso spent almost two decades trying to persuade companies to use this idea, arguing that ESOPs would help improve productivity while simultaneously offering tax benefits. A few adopted Kelso's idea, but most companies remained concerned that courts would find ESOPs improper and void the tax benefits that Kelso was proclaiming. Kelso needed a law.

Louis Kelso Meets Russell Long

It turned out that there was just a person to do this. In the 1920s, Huey Long, a populist politician from Louisiana, was making quite a reputation for himself as a state governor, US senator, and presidential candidate. He argued strongly for redistributing wealth from the rich to everyone else. His career was cut short when he was assassinated by the son-in-law of a judge Long had maneuvered out of office. His son, Russell Long, became a US senator during the 1940s. By the 1960s, he had become the chair of the Senate Finance Committee, the group that writes the nation's tax laws. That made him one of the most powerful senators.

Russell Long and Kelso met in 1974. Long was interested in Kelso's plan, claiming that Kelso's ESOP idea was "Huey Long without the Robin Hood." In other words, ESOPs would make the distribution of wealth fairer without "robbing from the rich." ESOPs, they believed, were a way to use the capitalist system itself to create a more equitable distribution of wealth within the economy. Instead of allowing rich people to get richer and then taxing them at higher rates (which, Long believed, discouraged investment and could in turn hurt the economy), ESOP legislation aimed to change the way future wealth became owned. Long, inspired by this idea, began a crusade to provide ESOPs with tax incentives and shepherded 17 pieces of legislation through Congress in 12 years. More bills were added after that, the latest having passed in 2022.

As a result, there are now substantial tax incentives to encourage companies to use ESOPs. In most cases, companies borrow money with an ESOP loan and use the money to buy stock from an owner. Instead of borrowing, the ESOP can also buy stock with periodic cash contributions from the company, or the company can just contribute stock to the ESOP.

ESOPs are one of the rare ideas to restructure the US economy that have support from the right, left, and center, from Ronald Reagan to Bernie Sanders. As one poll found, Americans are apt to agree that employee ownership of their company is All-American, just like baseball, hot dogs, and apple pie.

Have ESOPs Worked?

More than 15 million Americans are currently owners through ESOPs. Research on employee ownership reveals that employee-owned companies that promote employee involvement outperform their competitors by a substantial margin, and that employees in these plans experience significantly better outcomes in terms of retirement and other work-related conditions. See The Retirement Savings Crisis and the Role of ESOPs. Broad-based employee ownership is gaining popularity outside of the US, partly due to the success of US ESOPs. For example, employee ownership trusts (EOTs), which first became popular in the UK, are becoming more widespread there and are also spreading in the US. And other countries are using EOTs and other trust-based models for worker ownership. Employee ownership has a long, long way to go because the vast majority of employees are still not in these plans, but it has come a very long way.