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20–073 2016

S IS FOR SAVINGS: PRO-GROWTH BENEFITS OF 

EMPLOYEE-OWNED S CORPORATIONS 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

SECOND SESSION 

HEARING HELD 

APRIL 27, 2016 

Small Business Committee Document Number 114–058 

Available via the GPO Website: www.fdsys.gov 

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Congress.#13
(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

STEVE CHABOT, Ohio, Chairman 

STEVE KING, Iowa 

BLAINE LUETKEMEYER, Missouri 

RICHARD HANNA, New York 

TIM HUELSKAMP, Kansas 

CHRIS GIBSON, New York 

DAVE BRAT, Virginia 

AUMUA AMATA COLEMAN RADEWAGEN, American Samoa 

STEVE KNIGHT, California 

CARLOS CURBELO, Florida 

CRESENT HARDY, Nevada 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

YVETTE CLARK, New York 

JUDY CHU, California 

JANICE HAHN, California 

DONALD PAYNE, JR., New Jersey 

GRACE MENG, New York 

BRENDA LAWRENCE, Michigan 

ALMA ADAMS, North Carolina 

SETH MOULTON, Massachusetts 

MARK TAKAI, Hawaii 

KEVIN FITZPATRICK, Staff Director 

EMILY MURPHY, Deputy Staff Director for Policy 

JAN OLIVER, Chief Counsel 

MICHAEL DAY, Minority Staff Director 

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(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. Steve Chabot ................................................................................................... 1 

Hon. Nydia Vela ́zquez ............................................................................................. 2 

WITNESSES 

Mr. Peter S. Strange, Chairman Emeritus, Messer Inc., Cincinnati, OH .......... 4 

Mr. Jay Hardy, President, Hardy Diagnostics, Santa Maria, CA, testifying 

on behalf of the Warren County Chamber Alliance .......................................... 5 

Mr. Alex Brill, Resident Fellow, American Enterprise Institute, Washington, 

DC .......................................................................................................................... 7 

Ms. Stephanie E. Silverman, President & Executive Director, EmployeeOwned S Corporations of America, Washington, DC ........................................ 8 

APPENDIX 

Prepared Statements: 

Mr. Peter S. Strange, Chairman Emeritus, Messer Inc., Cincinnati, OH ... 20 

Mr. Jay Hardy, President, Hardy Diagnostics, Santa Maria, CA, testifying on behalf of the Warren County Chamber Alliance ......................... 28 

Mr. Alex Brill, Resident Fellow, American Enterprise Institute, Washington, DC ..................................................................................................... 40 

Ms. Stephanie E. Silverman, President & Executive Director, EmployeeOwned S Corporations of America, Washington, DC ................................. 49 

Questions for the Record: 

None. 

Answers for the Record: 

None. 

Additional Material for the Record: 

None. 

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(1) 

S IS FOR SAVINGS: PRO-GROWTH BENEFITS 

OF EMPLOYEE-OWNED S CORPORATIONS 

WEDNESDAY, APRIL 27, 2016 

HOUSE OF REPRESENTATIVES, COMMITTEE ON SMALL BUSINESS, Washington, DC. 

The Committee met, pursuant to call, at 10:00 a.m., in Room 

2360, Rayburn House Office Building, Hon. Steve Chabot [chairman of the Committee] presiding. 

Present: Representatives Chabot, Luetkemeyer, Brat, Hardy, 

Kelly, Vela ́zquez, Hahn, Meng, and Adams. 

Chairman CHABOT. Good morning. The Committee will come to 

order. 

Special thanks to our witnesses who have traveled to our Nation’s capital and taken time away from their busy schedules to be 

with us here today. We are pleased to be joined today by our colleague Mr. Reichert from Washington. Mr. Kind from Wisconsin, 

had intended to be with us but something came up he is unable 

to be with us today. But they, together, introduced H.R. 2096, the 

Promotion and Expansion of Private Employee Ownership Act of 

2015. So it is a bipartisan bill. We have provided a copy of the section by section bill for the members’ information. 

I am also pleased to welcome some very special guests from the 

Warren County, Ohio, part of my district, who are in the audience 

here today. 

With National Small Business Week right around the corner, we 

must do all we can to support America’s 28 million small businesses, which are responsible for 7 out of every 10 new jobs created 

in America today. As part of that effort, I believe that small companies in my home State of Ohio have an important story to tell 

about what has worked so well for them. In many ways, Ohio small 

businesses can serve as a model for small businesses nationwide. 

I am very happy that two of our witnesses, Jay Hardy and Pete 

Strange, have strong ties to Ohio, and they will share their stories 

about one critical way we can support them and job creators like 

them all across America. 

Our country was founded on the idea that free markets and free 

enterprise provide the best economic compass for a free people. At 

the heart of this issue is the relationship between employers, their 

employees, and the customers they serve. Too often, government 

red tape and our broken tax code interfere with this relationship, 

doing a disservice to all involved. 

Our economy works best when America’s entrepreneurs are free 

to make their own decisions, take their own risks, and run their 

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2 

businesses as they see fit—free from government interference. That 

is exactly what employee stock ownership programs, or ESOPs, do. 

If companies so choose, they can convert employees into owners 

who share in the profits of the company. This equity lets them 

share in the American Dream and have a stake in their own future. It also helps them save money as they plan for their golden 

years. 

S corporations have only been allowed to form ESOPs since 1998. 

Since then, the research has reinforced what we hear from small 

businesses all the time—this structure works, and it works especially well for small companies. H.R. 2096 would provide additional 

help for S corporations interested in forming ESOPs, strengthening 

these important vehicles—that being the ESOPs—as vehicles that 

more and more companies would be able to take advantage of to 

help their employees. 

I am looking forward to hearing from our very distinguished 

panel of witnesses here this morning, and at this time, I would like 

to yield to the Ranking Member, Ms. Vela ́zquez, for her opening 

statement. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. Good morning. 

As part of their retirement plan, Americans have traditionally relied on employer-based options. For small firms, however, providing 

such plans is a two-prong challenge. They not only have to set up 

and administer the plan, but enroll their employees as well. This 

resource and time-intensive process has resulted in only 14 percent 

of small firms offering such a benefit. A recent approach to helping 

more small companies provide for their employees are through employee stock ownership plans (ESOPs), a type of defined contribution retirement plan. Companies using this plan not only provide 

a retirement savings vehicle, but also provide more stable employment than other businesses. Reports have shown that they even 

outperformed the S&P 500 Total Returns Index in terms of total 

return by participant by 62 percent and distribution to participants 

totaled nearly $30 billion in a decade. These numbers are impressive and merit a closer look at ESOPs. We must also investigate 

why more small businesses are not using this beneficial plan. Today’s hearing will give us that opportunity. 

While the S ESOP has only existed for a short while, we are seeing the benefit to employers, employees, and the national economy. 

In fact, the number of ESOPs have more than doubled since 2002, 

proving they are worth the trouble and expense for a business to 

use. 

Nevertheless, the ESOP is still a very foreign concept for many 

small business owners. Whether it is due to a lack of awareness or 

intimidation from the complex rules, I hope to find out today where 

the primary challenges lie for small firms. But whatever the reason 

is, we should be doing more to enlighten employers and make it a 

more attractive retirement vehicle. As our population ages, it is 

critical that small employers and their employees have access to 

quality financial security in their retirement years. We have made 

strides to enroll more workers through the my RA payroll deduction account and state-sponsored retirement savings plans, like 

automatic IRAs and multiple employer plans. We can do better and 

S ESOPs are one option. 

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3 

I look forward to hearing from our witnesses about the advantages of S ESOPs and what challenges face owners who decide they 

are the right move for their business. Today’s discussion about H.R. 

2096 will also help educate members on the bill and how it is 

meant to attract small business employers to this plan. 

In advance of the testimony, I want to thank all the witnesses 

for both your participation and insights into this important topic. 

With that, Mr. Chairman, I yield back. 

Chairman CHABOT. Thank you very much. The gentlelady 

yields back. 

If committee members have opening statements prepared, I 

would ask that they submit them for the record. 

I will now take just a couple moments to explain our timing system that we have here. It is a 5-minute rule that we operate by. 

It is pretty simple. You will have a lighting system to help you out. 

The green light stays on for 4 minutes and then a yellow light will 

come on and let you know you have about a minute to wrap up. 

When the red light comes on, we would ask you to try to stay within that if possible. If you go over a little bit we will give you a little 

flexibility but not a lot. So we would ask you to try to do that, and 

we hold ourselves to the same 5-minute rule. We are stricter there 

than we are with you all. 

We will begin by introducing our witnesses. Our first witness is 

Pete Strange, who is chairman emeritus of Messer, Incorporated, 

which is based in my hometown of Cincinnati, Ohio. Messer, Inc. 

is the parent company of Messer Construction Company, a regional 

general contractor and construction manager, and Messer Financial 

Services, a diversified investment firm. Mr. Strange served as 

Messer’s chairman from 1990 through 2013, so for 23 years. He has 

also served on a variety of community and industry boards in Cincinnati, including the Cincinnati branch of the Federal Reserve 

Bank of Cleveland and the Cincinnati USA Regional Chamber of 

Commerce, among others. 

Our second witness is Jay Hardy, president of Hardy Diagnostics 

in Santa Maria, California, and also in our district. This morning, 

Mr. Hardy will be testifying on behalf of the Warren County Chamber Alliance of Warren County, Ohio. Party Diagnostic manufactures over 3,500 different products used in microbiology laboratories. Currently, they have two manufacturing facilities, one in 

Santa Maria, California, and the other located in Springboro, Warren County, Ohio, which as I mentioned before, is in our district. 

Our third witness today is Alex Brill, who is a resident fellow at 

the American Enterprise Institute in Washington, D.C., here. Mr. 

Brill is also the CEO of Matrix Global Advisors, a Washington, 

D.C.-based economic policy consulting firm. Prior to this, Mr. Brill 

was the policy director and chief economist of the House Ways and 

Means Committee. He also served as an advisor to the SimpsonBowles bipartisan Deficit Reduction Commission, and as staff economist to the White House Council of Economic Advisors. 

We welcome all three of you here, and I would now like to yield 

to the ranking member for the purpose of introducing our fourth 

witness. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. It is my pleasure 

to introduce Ms. Stephanie Silverman, president and executive diSBREP-219A with DISTILLER

4 

rector of the Employee-Owned S Corporations of America. She is 

also founder and CEO of Venn Strategies LLC. Before launching 

her own firm, Stephanie was a senior advisor in the Washington, 

D.C., government relations practice of Manatt, Phelps and Phillips, 

a national firm specializing in matters of national and international policy. She holds an MBA from the Wharton School of 

Business and an undergraduate degree from Duke University. Welcome. 

Chairman CHABOT. Thank you. 

Now having introduced our panel, we will hear from them. We 

will begin with Mr. Strange. You are recognized for 5 minutes. 

STATEMENTS OF PETER S. STRANGE, CHAIRMAN EMERITUS, 

MESSER, INC.; JAY HARDY, PRESIDENT, HARDY 

DIAGNOSTICS; ALEX BRILL, RESIDENT FELLOW, AMERICAN 

ENTERPRISE INSTITUTE; STEPHANIE E. SILVERMAN, PRESIDENT AND EXECUTIVE DIRECTOR, EMPLOYEE-OWNED S 

CORPORATIONS OF AMERICA 

STATEMENT OF PETER S. STRANGE 

Mr. STRANGE. Chairman Chabot, Ranking Member Vela ́zquez, 

and distinguished members of the Committee, thank you for inviting me to testify before you today to share my story of inclusive 

capitalism and the impact it has had upon hundreds of my fellow 

employees at Messer Construction. Thank you for holding this 

hearing to learn more about ESOPs and legislation that can encourage more businesses to become employee owned. 

My name is Pete Strange and I began working at Messer Construction as a project engineer in 1968. I retired from management 

a couple of years ago after 23 years as CEO. Mine is the tale of 

two careers. In 1968, Messer was a Cincinnati-based, medium-size, 

family-owned construction company with a long history and a good 

reputation. Like most companies in construction, it had little in the 

way of employee benefits. By 1990, company-funded retirement 

benefits totaled only a million and a half dollars on behalf of 99 

participants. In 1998, the last son of the company founder died and 

we found ourselves with an uncertain future. The grandchildren of 

the founder wanted access to their wealth, and having no connection with the employees, were not committed to maintaining employment at the company. 

In 1990, the Messer employees were able to buy their future from 

the Messer family using the ESOP structure. I led the employee 

group through those negotiations, so I can tell you firsthand that 

we employees could not have purchased the company if not for the 

important tax advantages that the ESOP model afforded us. Our 

company’s investment in ESOPs allowed 99 Messer employees to 

purchase our future, and the engagement that opportunity created 

has resulted in growth. Today, operating from nine regional offices, 

Messer performs more than a billion dollars in construction annually, focusing upon health care, higher education, and life sciences 

projects. 

Here is the measure of the change that our ESOP brought to our 

retirement savings. Messer now provides quality jobs and predictable retirement for over 1,000 individuals and has company-funded 

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retirement assets for those employees, totaling more than $220 million. 

Through our engagement with the Employee-Owned S Corporations of America, we have come to know hundreds of companies 

with stories similar to ours, and the data from ESCA’s quality research shows that ESOP companies are more robust, more sustainable, and provide higher levels of diversified retirement benefits 

than non-ESOP companies. 

The Messer ESOP is in place and it is working well for us. However, Messer manages a vendor supply chain of small local subcontractors who are increasingly at risk from forces both external 

and internal. Creating a more supportive environment for those 

companies to form ESOPs, both for the benefit of their employees 

and to reduce the risk and volatility that results from unplanned 

succession will be a direct benefit to our communities, to our customers, and to our company as we compete in a global economy. 

I have had only one employer in my more than 40-year career, 

but I have had two completely different employment opportunities. 

Messer is a clear example of the power of inclusive capitalism that 

results from supporting sub-S ESOPs. I invite you to visit us or an 

employee-owned company in your district or State so you can feel 

firsthand the pride employee-owners take in their work and the 

confidence that employee-owners have in their future. 

Mr. Chairman and committee members, I thank you for this opportunity to address the Committee and share Messer’s story, and 

for your consideration of legislation that will allow more hardworking Americans to share in the American Dream at work. 

Thank you. 

Chairman CHABOT. Thank you very much. We appreciate it. 

Mr. Hardy, you are recognized for 5 minutes. 

STATEMENT OF JAY HARDY 

Mr. HARDY. First of all, I would like to thank Chairman Chabot 

today for inviting me to voice my support of H.R. 2096 and the proposed incentives to increase employee ownership in America. I 

would also like to thank Ranking Member Vela ́zquez and the other 

members of the Small Business Committee. 

My name is Jay Hardy. I am the president and founding partner 

of Hardy Diagnostics, a medical device manufacturer based in California with a manufacturing facility in Ohio and Texas. We have 

been in business for 36 years servicing the laboratory industry, and 

we currently have 350 employees. 

Four years ago, I sold 70 percent of my shares to our newly 

formed ESOP. Last year, I sold the remaining shares, making our 

company a 100 percent employee-owned S corporation. I have never 

had any regrets in making this decision, which has set our company on a course of increased growth and prosperity for the reasons that I would like to describe for you today. 

Since becoming an ESOP, our company has grown by 78 percent, 

so I think the numbers speak for themselves. The ESOP structure 

was defined in Congress as a part of the ERISA laws in 1974. Just 

as Abraham Lincoln’s Homestead Act of 1862 created wealth for ordinary citizens by granting them 160 acres of land, the ESOP also 

has the potential to create wealth for all Americans without having 

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to own land. Within the ESOP, employees are granted shares of the 

company they work for without cost to them or taxation. 

Currently, there are over 11 million ESOP participants in America. This number needs to grow, and here is why. Recent studies 

have shown that ESOP companies are 25 percent more likely to 

stay in business than non-ESOPs. Employee-owners were four 

times less likely to get laid off during our last recession. Employeeowners have two and a half times more money in their retirement 

accounts than non-ESOP employees. Employer-owners receive 5 to 

12 percent more in wages than non-ESOP employees. Employerowners are 5 to 10 percent more productive than their non-ESOP 

counterparts. So you can see that ESOPs are undoubtedly a very 

good thing for the American worker, and thus, very good for the 

American economy in general. 

Today, we hear a lot of talk about income inequality and capitalism being good only for the privileged 1 percent. Why can capitalism not be accessible for all American workers by owning a portion of the companies that they work for? While capitalism may 

have its flaws, the modern ESOP provides a way to correct those 

flaws. This is why the ESOP has been nicknamed ‘‘universal capitalism’’ or ‘‘capitalism for the masses.’’ The employee-owners turn 

out to be highly motivated because they know that their efforts will 

be directly rewarded through an increase in share value. This, in 

turn, makes the American ESOP more able to successfully compete 

in the world market. 

Today, many workers are afraid that Social Security or their 

meager 401(k) savings will not be adequate for their retirement. 

The ESOP will substantially supplement those retirement programs in a very significant way. 

The original idea of employee ownership came from Lewis Kelso, 

who formed the first ESOP in 1956. He said, ‘‘The trouble with today’s finance is that they are designed to make the rich richer. 

None is designed to make the poor richer.’’ He also said, ‘‘If capital 

ownership is good for the rich, it is a thousand times better for the 

middle-class and the poor.’’ 

The workers at Hardy Diagnostics now know that their daily 

work is not drudgery but rather an exciting investment in their 

own personal financial future. 

In preparation for this testimony today, I asked the employeeowners of our company to provide me with their own thoughts 

about the ESOP which they own. One of them said, ‘‘Since becoming an ESOP, I have found an avenue in which every employee has 

an opportunity to be engaged in our company’s steady climb of 

growth. As a manager, nothing is more rewarding than seeing individuals in my department with such a high level of enthusiasm for 

the success of our company, as well as their own personal growth 

and achievements.’’ Another employee-owner said, ‘‘Being a part of 

an ESOP breaks down title barriers. We all have the same title, 

owner. Ownership inspires greater value and satisfaction in our 

daily work. Our work turns into an investment. It is no longer just 

a job.’’ 

So I think you get the idea. H.R. 2096 is an excellent piece of 

legislation that provides the necessary incentives for S corp business owners to create an employee-ownership program. This will 

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make the S corp ESOP a very attractive exit plan for business owners that wish to do the right thing in turning the ownership of 

their companies over to workers who made the business successful. 

H.R. 2096 also provides incentives for banks to fund the loans that 

make this transaction possible. 

Capitalism, for all its flaws, remains the best economic system 

the world has ever known. Let’s improve upon it by putting true 

ownership within reach of all American workers through the 

wealth-building program of the modern ESOP. I am passionate 

about employee ownership, and I enjoy being an evangelist for the 

ESOP movement here in America. 

I thank you once again, and I would be glad to answer any questions you may have. 

Chairman CHABOT. Thank you very much. 

Mr. Brill, you are recognized for 5 minutes. 

STATEMENT OF ALEX BRILL 

Mr. BRILL. Chairman Chabot, Ranking Member Vela ́zquez, and 

members of the Committee, thank you for the opportunity to appear before the Committee to discuss the role of S ESOPs in the 

U.S. economy. Allow me to summarize my written testimony which 

has been submitted for the record. 

S ESOPs define contribution retirement plans that allow employees to become owners in their employer exist across a wide spectrum of industries and include a meaningful number of U.S. employees. S ESOPs can improve worker commitment, increase firm 

productivity, reduce worker turnover, and lower production costs. S 

ESOPs proved resilient in the face of the most recent recession, 

and thereby, helped mitigate the adverse effects of the recession on 

S ESOP suppliers and related business activities. 

A few specific facts. The number of S ESOPs has increased 131 

percent from 2002 through 2013, reaching 2,626 by my count. This 

increase has been steady year over year aside from a slight dip 

during the recessionary period in 2008. More important, however, 

than the trend in the number of S ESOPs is the increase in the 

number of employee-owners working at these firms. The number of 

active participants at S ESOPs increased 167 percent from almost 

200,000 people in the year 2002, to over 520,000 in the year 2013. 

Since 2008 alone, active participants at S ESOPs have increased 30 

percent. 

It should be noted that because not all employees are necessarily 

S ESOP owners, the number of participants, the statistics I was 

just citing, is a conservative estimate of employment by these 

firms. 

Some of the growth in S ESOP employment is attributable to 

firms hiring more workers, and some is attributable to the rising 

popularity to S ESOPs generally. In other words, this large increase in S ESOP employment I just described does not entirely 

represent just organic job growth within S ESOPs; it also reflects 

firms converting to S ESOP status. I analyzed the subset of all the 

S ESOPs, those operating consistently from the period 2002 

through 2014, and found that in these firms, employment grew 30 

percent, while at the same period, overall U.S. employment grew 

just 6 percent. 

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Now, a word about the economic evidence. ESOPs tend to perform better than their peers, and the mechanism by which this occurs is at least, in part, the additional commitment workers make 

as they become owners in their firms. This is particularly important in the small business context. The success of small- and medium-sized enterprises is often reliant on the ability of firms to ensure their employees work effectively and cohesively. 

Higher worker commitment and lower turnover rates are key 

components for small business success in an increasingly competitive marketplace. By strengthening this worker commitment to 

their employer, the S ESOP structure can help foster efficiency, increase productivity, and grow output. 

I would also like to stress that the benefits of S ESOPs are not 

limited to just their firms and their employees. The demonstrated 

resilience of S ESOPs benefit the whole economy. For example, 

during a recession, bankruptcy for small businesses is not uncommon, and this can have a domino effect, imposing financial hardships not only on workers, but on the firm’s suppliers and other 

local businesses. To the extent that S ESOPS mitigate these effects 

through their resilience, they represent and offer a positive externality to the economy. 

In conclusion, as the U.S. seeks to rebound from a period of tepid 

productivity growth, S ESOPs are a valuable tool in promoting 

growth, not only among small businesses, but indirectly in the 

economy overall. 

Thank you, and I would be happy to answer your questions. 

Chairman CHABOT. Thank you very much. 

Ms. Silverman, you are recognized for 5 minutes. 

STATEMENT OF STEPHANIE E. SILVERMAN 

Ms. SILVERMAN. Good morning, Chairman Chabot, Ranking 

Member Vela ́zquez, and distinguished members of the Committee. 

My name is Stephanie Silverman, and I am president and executive director of the Employee-Owned S Corporations of America. 

Thank you for the opportunity to testify today about the success of 

S corporations that are owned by their employees, or S corporation 

ESOPs, and on bipartisan legislation to expand employee ownership. 

ESCA represents S ESOP companies in every State, in industries 

from heavy manufacturing to construction to school photography. 

Since first being allowed to form in 1998, the nearly 3,000 S ESOP 

companies in the U.S. now account for $92 billion in direct output 

to the U.S. economy each year. Twenty years ago, Congress passed 

legislation creating S ESOPs. Congress’s goal was to encourage employee ownership of private industry, enable workers to benefit 

from their labor, and create a path for building meaningful retirement savings. Data shows that today S ESOPs are doing precisely 

that. Twenty years later, private S ESOP companies have been a 

remarkable success story, a bright spot in an economy characterized by sluggish growth, anemic job creation, and worker insecurity. Many studies by renowned economists from across the ideological spectrum illustrate how S ESOPs are powerful for workers as 

a retirement savings and economic security tool and how they have 

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contributed to communities and to the national economy. I will 

touch on a few key points from the most recent studies. 

Earlier this year, economist Jared Bernstein released a study 

that shows S ESOPs reduce wage and wealth inequality. Bernstein 

also found ESOP companies pay their workers better wages and 

provide them with more stable employment than other comparable 

businesses. With Congress searching for solutions for boosting 

worker savings, job prospects, and wages, the S ESOP’s success 

story reminds us this goal can be reached through capital ownership shared among works. 

At a time when almost half of working Americans do not have 

any retirement plan at work, S ESOPs also provide unparalleled 

worker retirement savings opportunities. As Ranking Member 

Vela ́zquez recently noted, between 2002 and 2012, S ESOPs outperformed the S&P 500 and their net assets increased over 300 

percent, allowing them to distribute nearly $30 billion in retirement savings to their employee-owner participants. 

The savings benefit to employees does not come with additional 

risk. Moreover, private employee-owned businesses are proven to 

be more stable than their counterparts. In 2014, the National Center for Employee Ownership released data showing that the default 

rate on bank loans to private ESOP companies was an astonishingly low 0.2 percent annually. This compares to mid-market companies defaulting on loans at a rate 10 times higher or greater. 

Eight years ago, as members of Congress began to hear from 

companies and workers in their districts, they began asking, what 

can Congress do to encourage more S ESOPs to form? The answer 

to that question prompted what is currently H.R. 2096, the Promotion and Expansion of Private Employee Ownership Act. First 

introduced by Congressman Ron Kind in the 111th Congress, the 

bill has been introduced in the subsequent three congresses led by 

Congressman Dave Reichert and Mr. Kind. Today it has 67 bipartisan cosponsors, including 21 members of the Tax Writing Ways 

and Means Committee, and in the Senate, the counterpart S. 1212 

has 28 cosponsors. In short, that bill would provide incentives to 

owners of S corporations to sell their stock to an ESOP. Today 

those incentives exist but only for owners of C corporations. Section 

1042 of the Tax Code allows a C corporation owner to defer the recognition of gains when the owner sells shares to an ESOP. Expending parody to S corporation owners is the single-most significant 

legislative action that Congress can take to encourage more of the 

millions of S corporation owners to choose an ESOP when they consider how to transition their businesses from their current ownership structure. It also would encourage banks to lend to S ESOPs 

to create more ESOP ownership of companies. Under the proposal, 

banks could deduct 50 percent of interest income on certain loans 

made to an ESOP. Employees often lack the funds to buy a company directly, and not all banks understand the ESOP structure, 

which may cause them to limit lending to these vibrant businesses. 

This incentive can address those challenges. It would provide assistance to would-be S ESOP companies through an employee-ownership assistance office at Treasury, and it would permit an SBAcertified small business to remain eligible for SBA programs after 

becoming majority-owned by an ESOP. 

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Quite simply, more S ESOPs mean more worker savings, more 

wealth and wage equality, and more job stability. That is why we 

hope this committee, and your colleagues in Congress, will help advance this vital measure. Thank you for the opportunity to testify, 

and I would be happy to answer any questions. 

Chairman CHABOT. Thank you very much. 

We will now go to the questioning part, and I will begin with myself. I will begin with you, Mr. Strange, if I can. Where do you expect that your company would be now had it not converted to an 

ESOP back in 1990? I know it is impossible to know that, but if 

you could try. 

Mr. STRANGE. The opportunities that the family considered, in 

addition to selling to the employees, were to sell the assets, we had 

some equipment and property, or to sell to a larger construction 

company. What is certain is that the company would not exist and 

would probably not be housed in Cincinnati, Ohio, if the employees 

had not purchased it. What is equally certain is that the math 

worked in our favor. Because of the rollover, the sellers were able 

to get a better deal from us, and because of the long-term thinking 

of the ESOP, we describe Messer as a ‘‘get rich slow’’ scheme, we 

were able to amortize our efforts in buying the capital over a much 

longer period of time than a normal financial buyer would have. 

Chairman CHABOT. Thank you. How many employees were impacted at that time then as a result of this? 

Mr. STRANGE. Ninety-nine. 

Chairman CHABOT. Ninety-nine. 

Mr. STRANGE. There were 99 employees in a recently formed— 

it is 4 years old—profit-sharing plan that had the 1.5 in it. Prior 

to that we had no retirement plan because the hearty independent 

folk in construction thought we ought to fend for ourselves. 

Chairman CHABOT. Okay. One thing that I can testify to is 

when you drive around the greater Cincinnati area, you will see an 

awful lot of construction going on with the Messer name on there, 

so they do a lot of work all over other place. 

Mr. STRANGE. Thank you. 

Chairman CHABOT. Thank you. 

Mr. Hardy, I will go to you next, if I can. What changes did you 

notice in your company, and employees, especially, after it became 

employee-owned? 

Mr. HARDY. There were a lot of changes. I think one, would be 

that people had more enthusiasm for their jobs. In the past it was 

kind of a problem. People punch in, they punch out. Some of them 

were not fully engaged in what we are doing, but I have seen a remarkable change over the last 4 years. They were getting very, 

very interested, and we are teaching them business practices. All 

of our employees learn a little bit about how to interpret financial 

statements. They look at income statements and balance sheets. 

We are also an opening book management company, so all the 

books are open to all of our employees. They can see how we are 

doing month-to-month, and they appreciate that. Whether it is 

good news or bad news, they see all that. I think there is more of 

a spirit of cooperation. Productivity is up. Sales are up. It has just 

been a terrific change for our company. 

Chairman CHABOT. Thank you. 

SBREP-219A with DISTILLER

11 

Mr. Brill, as you have studied employee-owned companies over 

the years, what are the most compelling factors you found that contribute to their success? Also, what would you say are the biggest 

barriers that you have identified to the creation of more ESOP 

companies? 

Mr. BRILL. Thank you, Mr. Chairman. 

The evidence, both the survey evidence and some of the empirical 

research, really mirrors the testimony that Mr. Hardy just offered, 

that workers are more enthusiastic. The terminology I used in my 

testimony is worker commitment, but these are basically the same 

notions, that workers feel better about going to work. They are 

more willing to work hard, to put in a little extra, to stay a little 

late. They are more aware of their surroundings, more willing to 

offer suggestions to their managers about how things could be done 

better and more efficiently. There is evidence that employees in 

ESOP structures, S ESOPs included, require less management, and 

that is a cost savings. If you need fewer managers to keep an eye 

on the workers, you are saving money, knowing that the employees 

are motivated themselves for hard work. 

Chairman CHABOT. Thank you. Are there any barriers that you 

have seen? 

Mr. BRILL. It does seem surprising that there are not more S 

ESOPs, to be frank, and I am not quite sure why that is. There 

seems to be some sort of breakdown in the communication in the 

marketplace about owners and founders not being aware of these 

tools. 

Chairman CHABOT. Perhaps because of the huge following that 

we have in this Committee over the C-SPAN coverage that we get, 

that there will be far more soon. 

Mr. BRILL. Hopefully. 

Chairman CHABOT. Thank you. 

I am almost out of time, but let me turn to you, Ms. Silverman. 

How safe are ESOPs when employees have their retirement savings tied up to the success of the business? Would you comment on 

that? 

Ms. SILVERMAN. Thank you, Mr. Chairman. The question 

speaks to the issue of diversification, and I think that it is important to understand that S ESOPs provide some of the most diversified retirement opportunities. First, because ERISA requires the 

ESOP structure to allow for diversification. As an employee gets 

further along in their tenure and older, ERISA requires a company 

to allow employees to begin diversifying out of the ESOP plan. Second, while most U.S. companies, about half of U.S. companies, do 

not offer any retirement savings at work, the ESOP is a plan in 

every ESOP company. About 85 percent of ESCA’s members offer 

at least one additional plan at work. Usually that is a 401(k) plan, 

but it can be a profit-sharing plan as well. I think you will find 

that the culture of employee ownership encourages companies to 

take better care of their workers. 

Chairman CHABOT. Thank you very much. My time has expired. I will now yield to the ranking member for 5 minutes. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. 

Mr. Brill, and maybe Ms. Silverman, I am interested to know if 

any of you have analyzed how many minority small business ownSBREP-219A with DISTILLER

12 

ers have adopted ESOPs? How can we encourage more minority 

small businesses to adopt ESOPs? 

Ms. SILVERMAN. There has not been a full analysis of the question, but I can tell you from anecdotal evidence that there are too 

few minority business owners that have adopted this structure. I 

would attribute that from my own experience to a few factors. 

Number one, there is a certain level of education that company 

owners need to have. Only more sophisticated companies currently 

have access to the informational resources that they need to form 

these structures. 

Number two, as you yourself have noted in the past, there are 

capital access challenges for minority-owned businesses that are, 

unfortunately, disproportionate to the broader universe of small 

companies. We believe that encouraging banks to provide more capital access for purposes of transitioning to an ESOP will help to 

overcome that. 

Ms. VELA ́ ZQUEZ. Mr. Brill, do you have any comments? 

Mr. BRILL. No, I do not. 

Ms. VELA ́ ZQUEZ. Mr. Strange, you helped lead the 99 employees in their buyout of Messer. What is the process for establishing 

an ESOP, and how expensive and time-consuming was this process? 

Mr. STRANGE. The challenge was coming to common ground 

with the sellers. In our case, the sellers were not motivated by the 

welfare of the employees or even the continuity or sustainability of 

the enterprise. We spent considerable time in negotiating what was 

defined as a fair price. I do believe the perception of expense in creating an ESOP is a significant barrier for smaller companies. In 

our case, we used almost all local consultants. We had one national 

valuation firm that worked with us, and we found it to not be unbearably expensive, which was really important, because we did 

not have access to capital. That was very important for us. 

Ms. VELA ́ ZQUEZ. Thank you. 

Ms. Silverman, a major drawback that I see in using an ESOP 

is it can jeopardize a small business’ eligibility to participate in 

both the SBA and VA programs. The treatment of ESOP stock as 

either outstanding or excluded is critical to this determination. In 

fact, it became a problem for one service-disabled, veteran-owned 

small business who lost the designation because of their ESOP. 

Can you please explain this issue generally and how the legislation, H.R. 2096, addresses it? 

Ms. SILVERMAN. I think you raise a very important question, 

Congressman Vela ́zquez, and let me say this. There are very important concerns that remain to be rectified in the area of preserving minority- and women-owned and veteran-owned status. 

There are ways to structure additional provisions which we are 

currently looking at. We would be open to working with your office 

on, that would enable an ESOP company, if it had that designation 

prior to forming an ESOP, to retain that designation. Not to have 

special privileges, but simply not to lose its privileges. There are 

ways of rectifying that. 

Ms. VELA ́ ZQUEZ. So do you agree with me that section 6 of the 

bill is not enough? 

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13 

Ms. SILVERMAN. I agree with you that we would love to work 

with you on an expansion that includes more companies. Yes. 

Ms. VELA ́ ZQUEZ. Okay. 

I will ask any one of the panelists to comment or react to this 

question. We have heard the benefits is a tool for retiring business 

owners, but what about employees? What advantages does an 

ESOP have for them? 

Yes, Mr. Strange? 

Mr. STRANGE. The average turnover in commercial construction 

across the country is 28 percent per year. The ESOP, because of 

the longer term thinking, the deeper engagement, ours is a very, 

very small percentage of that. That level of stability allows employees to have better control of their future. The ESOP process requires communication with the employees, both to be successful 

and by rule. Having the information to make informed decisions 

about an individual’s own future and their family’s future is a huge 

differentiator. Finally, the requirement that you have an independent valuation each year gives a level of discipline to strategic 

planning that we never had before. 

Chairman CHABOT. The gentlelady’s time is expired. 

Ms. VELA ́ ZQUEZ. Thank you. 

Chairman CHABOT. The gentleman from Mississippi, Mr. Kelly, 

is recognized for 5 minutes. 

Mr. KELLY. Thank you, Mr. Chairman. I thank the witnesses 

for being here. This is for the full panel. What is the ideal type of 

company that can benefit from transitioning to employee ownership? Is it a better fit for any special type of company, like construction, manufacturing, et cetera, versus other types? Are there 

any type of companies that should not become ESOPs? 

Ms. SILVERMAN. I think it is important to understand that an 

ESOP can make a good company great, but it cannot make a bad 

company good. I can say that from our experience, we do not believe that the ESOP structure is a good idea for companies that are 

in jeopardy or look at it as a way to salvage a business that is otherwise at risk, for reasons outside of the ESOP structure. Companies that tend to be more capital-intensive benefit more from the 

ESOP structure, but we have seen ESOPs be very successful and 

service businesses as much as in manufacturing and other kinds of 

companies. It is important to keep in mind that because, as Mr. 

Hardy has suggested, they offer such a thoughtful way to transition ownership from an existing owner or founder. A company that 

is founded by an individual or group of individuals where there is 

no obvious successor available makes a very good candidate for an 

ESOP substructure, especially when the alternatives are private 

equity or a large foreign acquirer. 

Mr. KELLY. Mr. Brill, did you have any comments? 

Mr. BRILL. Thank you. I would echo Ms. Silverman’s comments. 

We observe in the data S ESOPs operating across a wide spectrum 

of industries today, both capital-intensive as well as service. The 

seven largest, for your information, industries that are home to S 

ESOPs are health care, manufacturing, retail trade, financing insurance, professional services, construction, and wholesale trade. 

Together, these seven industries represent approximately 70 perSBREP-219A with DISTILLER

14 

cent of all the active participants in S ESOPs. You see how diverse 

of a set that is. 

Mr. KELLY. This is for you, Mr. Brill, you might not know the 

answer to this. You talked a little bit about during the recession 

the formation of S ESOPs was not quite as much, but how did they 

weather the recession as opposed to other similar-type businesses? 

Did they do better or worse, or do you know? 

Mr. BRILL. We do have information on that question, both from 

research that I have done as well as other economists who have 

looked at that very issue. In general, S ESOPs outperformed similar companies during that period, 2007, 2008, 2009. We saw overall 

in the economy not only a significant decline in overall employment, but also a very small rebound in employment, as everyone 

on this Committee is well aware with total employment not reaching its previous stationary levels until sometime in 2014. Within 

the S ESOP community, there was a drop-off, as there was across 

the whole economy, but a rather sharp rebound. By 2009, I believe, 

the number of active participants in S ESOPs had exceeded its previous high. That is the resilience to which I was suggesting earlier. 

That is not only good for the workers who did not lose their jobs 

because their firms are more committed to them as they are more 

committed to their firms, but it is also good for the non-ESOPs in 

their community, whether it be the sandwich shop across the street 

or the supplier to those companies. 

Mr. KELLY. It is really not surprising to me that when you allow 

people to be vested in something, and to have to work and to earn 

it, that they appreciate it, and the benefits are coming to them if 

they work harder, so I thank you all. 

Very briefly, Ms. Silverman, what do you think are some of the 

biggest misconceptions that Congress has about the ESOP companies? 

Ms. SILVERMAN. I think that the single biggest misconception 

is that it is a lack of diversification; that employees are at risk 

somehow because they have retirement savings tied up in the fate 

of their company. The truth is that diversification is a very real 

phenomenon, more so in an S ESOP company than virtually any 

other comparable company in the economy that we know of. They 

generate a lot more retirement savings individually, and they have 

much more diversified plans and a much more, thoughtful compliance structure to ensure that employees are taken care of. 

Mr. KELLY. Thank you, Mr. Chairman, and witnesses. I yield 

back. 

Chairman CHABOT. Thank you. The gentleman yields back. 

The gentlelady from California, Ms. Hahn, is recognized for 5 

minutes. 

Ms. HAHN. Thank you, Chairman Chabot, and Ranking Member 

Vela ́zquez, for holding this hearing, and thank you to the witnesses 

for being here and testifying before us. Mr. Hardy, you mentioned 

it first, and it is true, every time you turn on the TV or particularly 

during this political season, we always hear someone talking about 

income inequality. It is clear that the American people are concerned about that and those wishing to lead our country in the future are concerned about that. While we are constantly hearing, I 

think both sides of the aisle have been talking about how to adSBREP-219A with DISTILLER

15 

dress these concerns. It has been really amazing to hear from our 

witnesses today that prove you do not have to choose between people and profits. You can follow business practices that actually promote both. 

Mr. Hardy, I really want to commend you for taking the risk and 

making your company a 100 percent employee-owned corporation. 

It is clear that your risk paid off. Your growth has been pretty phenomenal. 

What inspired you to make this change? We have heard about 

the education that needs to take place to make this transition. 

What inspired you, and who answered all your questions that you 

must have had going through this? Is there someone in our Small 

Business Administration that has been helpful? 

Mr. HARDY. Very good question. Well, for myself, personally, I 

wanted to make sure that our company would outlive me. I wanted 

to see that the company would go on and not be purchased by an 

outside company because I wanted to protect the jobs that we 

worked so hard to gain. 

As far as outside advice, we have a company that we work with. 

It is a third-party administrator that gave us good legal and accounting advice. Going back to what Congressman Kelly said, we 

were told at the time that if you have under 25 employees it could 

be very costly and very difficult. We had over 100 at the time. We 

spent approximately, I think it was $25,000 to $30,000 in setting 

up our ESOP with our legal and accounting fees, which was less 

than I thought it would cost. There are some ongoing fees in administering the program, but it is definitely within reach. There 

are a lot of people and a lot of organizations that give help to companies like ours. The National Centers for Employee Ownership, 

NCEO, is one of them. The ESOP Association is another one of 

them. They have conventions that they had. They are very supportive. They are promoting education amongst business owners. 

Ms. HAHN. What would be your greatest piece of advice that you 

would give other businesses who are considering making this transition? 

Mr. HARDY. Like I said in my testimony, I think it is the right 

thing to do. It is good for the employees. My employees, they are 

the ones that created the profit, and it is only fair to them that 

they get to enjoy the profit that they worked so hard for. 

Ms. HAHN. Thank you. 

Mr. HARDY. So they own it, and they are happy to do that. 

Ms. HAHN. Thank you. 

Ms. Silverman, I was going to follow up on this whole education 

piece because you mentioned to a response to our ranking member’s question about women-owned, minority-owned companies, and 

you put the onus on maybe lack of education. How can we improve 

that? How can we improve that kind of outreach? What is the right 

vehicle to actually administer this kind of education and outreach 

so that businesses could think about having more of an opportunity 

to transition to employee-owned? 

Ms. SILVERMAN. Thank you for the question. We believe that 

the right central hub for information is probably the Treasury Department because this is a law that combines tax policy and a defined benefits policy—or a defined contribution policy. The comSBREP-219A with DISTILLER

16 

bination of ERISA and taxes is a funky place to go for anybody to 

go to other than the Treasury Department. As Congress makes 

clear that it is more supportive and encouraging, I think it sends 

a message to the market. There was for a time a chilling effect. 

There was a worry that Congress would tinker with this in unintended ways and harm the structure. The more that Congress provides support through rhetoric, through advancing policy that encourages this, I think small business owners will get the message. 

Chairman CHABOT. Thank you. The gentlelady’s time is expired. 

The gentleman from Nevada, Mr. Hardy, who is the chairman of 

the Subcommittee on Investigations, Oversight, and Regulations, is 

recognized for 5 minutes. 

Mr. HARDY of Nevada. Thank you, Mr. Chairman. 

Myself, my partner and I started an S corp some 2 decades ago, 

and had the privilege of employing quite a few people at our peak. 

At the time, when we started trying to distribute shares out to our 

company, portions of the company did not know about the ESOP 

program until the economy became a little different. 

My question is, the reason we started bringing employees into 

our company, during the 2000 era, we were going very fast, and 

large corporations from overseas were looking at buying many companies up in Nevada, particularly construction companies, and we 

did not want to sell. We had an opportunity to sell our company 

out, but because we cared about our employees and enjoyed the 

type of craft that we were doing, we decided to work to where our 

employees could buy us up in a different direction. Then things 

changed, so once we heard about the ESOP it was too late. Do you 

believe this is an opportunity for these ESOP companies to help 

protect against big overseas companies coming in and diluting, and 

taking employees, and changing the environment, which it has in 

the Las Vegas valley? Do you see that as a protection for jobs here 

at home? 

Mr. STRANGE. Absolutely. My answer to why do an ESOP is because it is a competitive advantage. The return we get on the professional development and training is longer and more profound, 

more engaged. Training that is part of an ownership culture is 

more engaging. If you look at the challenge that we have as project 

leaders in construction, there are about 7.5 million employees in 

commercial construction in this country. There are more than 

500,000 employers. That is an invitation to someone having a financially-driven consolidation plan, and ESOPs are protection that 

creates a people-focused plan for those companies. We think that 

we need to do more. 

To the ranking member’s question about minority firms, once it 

becomes not just a matter of how you are going to make a living 

but how you are going to live your life, it changes how you invest 

in those areas as well. It is a competitive advantage and it is important protection. 

Mr. HARDY of Nevada. This is to anybody on the panel who 

wants to answer it. How did you find out about the ESOP program? 

Mr. HARDY. I found out about it through attending some of the 

conventions and seminars that I mentioned. These are going on all 

SBREP-219A with DISTILLER

17 

the time. It just appealed to me. It is very worker-friendly. As Mr. 

Strange said, it is the best thing for them and their families. There 

is a lot of information out there for people that want to seek it out. 

Mr. STRANGE. I knew less than nothing so I went to the library. All I learned in engineering school was two things. One was 

not to panic in the face of complexity, and the other was to respect 

data. So I just went down to the business desk and said, ‘‘What 

does ownership look like?’’ They gave me some articles. 

Mr. HARDY of Nevada. Thank you. One of the questions I have 

had as an owner myself in the past is the C ESOP, how does it 

work with all different levels of the employee class? Can somebody 

answer? Recently there was a casino in my hometown that just got 

purchased by an ESOP. How does that work with the different levels of employees? 

Ms. SILVERMAN. I can try to answer that. Thank you for the 

question. 

ERISA requires that you treat all employees equally. There are 

guardrails to ensure that highly compensated individuals cannot 

take more, or do better. So the casino worker in the mailroom is 

treated proportional to the CEO of the company. It is also true that 

people receive distributions. They all have to get distributions once 

they qualify. You cannot distinguish between different shares of 

ownership. Another thing about an S corporation, which you may 

recall, Congressman Hardy, is that you cannot have different classes of stock. Everybody has to be the same kind of a shareholder. 

There are also limitations on how high compensation can be treated for purposes of proportionality. I think it is about 200 thousand 

dollars. It does not matter. They do not treat you as if you had any 

more money. It is intended to be a level playing field for everyone. 

Mr. HARDY of Nevada. Thank you. I can see my time has expired. 

Chairman CHABOT. The gentleman yields back. 

The gentlelady from North Carolina, Ms. Adams, who is the 

Ranking Member of the Investigations, Oversight, and Investigations Subcommittee, is recognized for 5 minutes. 

Ms. ADAMS. Thank you, Mr. Chairman, and Ranking Member 

Vela ́zquez. Thank you for holding this hearing, and thank you for 

your testimony. 

Ms. Silverman, SBA-guaranteed ESOP loans exist to help retiring business owners, how common are these loans and what can 

the proceeds be used for? Someone talked about the risks, and I am 

curious about how well educated the employees are. I know you can 

get information on your own, but what kind of education do you do 

maybe as a company? 

Ms. SILVERMAN. Thank you, Congresswoman Adams. I am not 

familiar enough with the SBA loan program that enables the creation of S ESOPs, but we can learn more and get back to your office on that question. 

I would say that with respect to risks, ERISA requires sharing 

a lot of information with would-be owners before they become investors in the company. There is also a fiduciary who is named to 

be the guardian of the economic interests of the employee-owners. 

The fiduciary has to act separate and apart from the interest of the 

sellers. That fiduciary is, obliged under law, to have certain evaluaSBREP-219A with DISTILLER

18 

tive skills and make decisions that are intended for the best interests of the employee owners and not necessarily in the best interests of the individual or group of individuals who are selling the 

company. 

Ms. ADAMS. Okay. Let me ask in terms of setting up an ESOP, 

it seems to be quite complex. Can you describe the impact of 

ESOPs on minority-owned firms and other disadvantage-owned 

firms? Anyone on the panel. Ms. Silverman, you can start. 

Ms. SILVERMAN. I am happy to speak to this but I think others 

on the panel may have thoughts as well. I would say that it is getting easier. The more the S ESOP model proliferates, the more providers and advisors know about it. While the S ESOP knowledge 

corps really existed in a handful of cities, it is interesting. We have 

seen that in the early days of S ESOPs, really, the companies that 

became S ESOPs sprung up around city hubs where there were a 

handful of advisors who knew how to do these transactions. Now 

as the companies proliferate and expand, and as the data show 

how successful they are, not just for the companies but for the employee-owners who are amassing significant retirement savings, 

more providers and advisors are becoming aware. 

So that there are less hurdles but there are still things to be 

done. Ranking Member Vela ́zquez noted in her question that there 

are challenges with SBA rules and there are still things to be done 

to ensure that a minority-owned business does not lose that special 

distinction when, and if, they convert to an ESOP. That would be 

an area we would like to continue to work on. 

Ms. ADAMS. All right. Would someone else like to respond? Yes, 

Mr. Hardy? 

Mr. HARDY. Yes. We had some personal experience with that 

just recently. We are growing as a company. We needed another 

building to be built on our street, and the first thing I always do 

is go to the SBA. I have done this in the past. I think we have had 

three or four SBA loans in the past. When I applied this time, they 

shut me down and they said, ‘‘No, we cannot do that because you 

are now an ESOP.’’ That was very disappointing. I was very glad 

to see that H.R. 2096 will fix that problem. 

Ms. ADAMS. Yes, sir. Mr. Strange? 

Mr. STRANGE. One observation I would make is that as we 

have worked with minority- and women-owned businesses because 

we have a goal, because we are company cultured to have inclusion 

on every project, we are very early in the lifecycle for so many of 

these businesses. If we look at our spending last year was 20 percent of our total buy, it is a couple of hundred million dollars, but 

the large majority of those businesses have only been in business 

for 10 to 15 years. I think there is a maturity issue here. As these 

companies continue to grow, as their entrepreneurial originators 

age, if we have these structures around for them to get the education and support, we will see a lot more ESOPs. 

Ms. ADAMS. Thank you. You know, Enron’s employment retirements were heavily invested in the company, so what lessons and 

safeguards can be learned from such a failure? Anyone? 

Mr. STRANGE. I hate Enron. That is a lesson. What I would observe is what Ms. Silverman said. Bad leadership, bad strategy, 

SBREP-219A with DISTILLER

19 

bad ethics cannot be saved by an ESOP. You need the foundation 

in place if you are going to build a building on it. 

Ms. ADAMS. Thank you very much. I yield back, Mr. Chair. 

Chairman CHABOT. Thank you. The gentlelady yields back. Before we adjourn, I have one quick question. I think I will direct this 

at you, Pete. Being in the construction industry, you have a lot of 

tools and building materials and things like that. I know that there 

is sometimes a temptation for employees, and things may disappear here and there. With an ESOP, is there an attitude that, 

hey, this stuff belongs to me, too, all of us? This is my stuff. Is 

there, maybe, a disincentive for people to do that sort of thing? 

Mr. STRANGE. It is dangerous to start me on stories. In the 25 

years we have been an ESOP, we have not had a purchase order 

system. Any employee of Messer can walk into any supplier, and 

if they are smart enough to rattle off some number as a job number, they can walk out of there with anything. We have had almost 

zero loss and leakage from that. The feeling of responsibility that 

this is something that is mine, not something that is theirs, is 

transformational. 

Chairman CHABOT. Thank you very much. 

We want to thank all the witnesses for their testimony here. 

Really excellent. We have heard ample evidence that ESOPs are 

good for the companies, for their employees, and for the economy 

as a whole. As a result of hearing this, I would announce that I 

am going to direct my staff to put me on as a cosponsor of this legislation. We appreciate your testimony very much. 

I would ask unanimous consent that members have 5 legislative 

days to submit statements and supporting materials for the record. 

Without objection, so ordered. 

If there is no further business to come before the Committee, we 

are adjourned. Thank you very much. 

[Whereupon, at 12:08 p.m., the Committee was adjourned.] 

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A P P E N D I X 

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Insert offset folio 20 here 20073.001
21 

Chairman Chabot, Ranking Member Velazquez, and distinguished members of the Committee, thank you for inviting me to 

testify before you today to share my story of inclusive capitalism 

and the impact it has had upon hundreds of my fellow employees 

at Messer Construction. Thank you for holding this hearing to 

learn more about ESOPs and legislation that can encourage more 

businesses to become employee-owned. 

My name is Pete Strange: I began working at Messer Construction as a project engineer back in 1968; and I retired from management a couple of years ago after twenty-three years as CEO. Mine 

is the take of two careers. In 1968 Messer was a Cincinnati based, 

medium size, family-owned construction company with a long history and a good reputation; but like most companies in construction 

it had little in the way of employee benefits. By 1990 companyfunded retirement benefits totaled only $1,500,000 on behalf of 

about ninety-nine participants. 

In 1988 the last son of the company founder died and we found 

ourselves with an uncertain future. The grandchildren of the 

founder wanted access to their wealth and, having no connection 

with the employees, were not committed to maintaining employment at the company. In 1990 the Messer employees were able to 

buy their future from the Messer family, using the ESOP structure. 

I led the employee group through those negotiations, so I can tell 

you first hand that we employees could not have purchased the 

company if not for the important tax advantages that the ESOP 

model afforded us. 

Our country’s investment in ESOPs allowed ninety-nine Messer 

employees to purchase our future; and the engagement that opportunity created, has resulted in growth. Today, operating from nine 

regional offices, Messer performs more than a billion dollars in construction annually, focusing upon health care, higher education, 

and life sciences projects. And, here is the measure of the change 

that our ESOP brought to our retirement savings. Messer now provides quality jobs and predictable retirement for over 1000 individuals, and has company-funded retirement assets for those employees totaling more than $220,000,000. 

Through our engagement with the Employee-owned S Corporations of America we have come to know of hundreds of companies 

with stories similar to ours; and the data from ESCA’s quality research shows that ESOP companies are more robust, more sustainable and provide higher levels of diversified retirement benefits 

than non-ESOP companies. The Messer ESOP is in-place and 

working well for us; however, Messer manages a vendor supply 

chain of small local subcontractors who are increasingly at risk 

from forces both external and internal. Creating a more supportive 

environment for those companies to form ESOPs, both for the benefit of their employees and to reduce the risk and volatility that results from unplanned succession, will be a direct benefit to our 

communities, to our customers and to our company as we compete 

in a global economy. 

I have only had one employer in my more than forty year career; 

but I have had two completely different employment opportunities. 

SBREP-219A with DISTILLER

22 

Messer is a clear example of the power of inclusive capitalism that 

results from supporting Sub S ESOPs. I invite you to visit us or 

an employee-owned company in your district or state; so you can 

feel first-hand the pride employee-owners take in their work, and 

the confidence that employee-owners have in their future. 

CONCLUSION 

Mr. Chairman and committee members, I thank you for this opportunity to address the committee and share Messer’s story, and 

for your consideration of legislation that will allow more hardworking Americans to share in the American Dream at work. 

SBREP-219A with DISTILLER

23 

Addendum 1 to the Testimony of Peter S. Strange 

April 16, 2016 

Direct Impact of the Messer ESOP Upon individual 

Retirement Savings 

The measure of success of any retirement strategy is the replacement income that an individual employee can expect between the 

age of retirement and the age of death. Peter Strange joined 

Messer in 1968 as a project engineer and advanced through the 

company to the position of Vice President, Operations, in 1984. At 

the end of 1989, after 23 years of service, Pete Strange’s companyfunded retirement savings would have provided an estimated 

monthly income (at a 6% annuity rate) of approximately $250 dollars per month. 

The Messer ESOP was implemented in 1990. By comparison, employees who entered Messer as Project Engineers in 1990 and remained with the company through 2015 (twenty-five years) have 

company-funded retirement savings that would, on the same basis, 

provide an estimated monthly income of $5,500 per month. 

Three footnotes: 

1. Both calculations are performed as if the employee retired 

on the calculation date; while in fact both Pete Strange and the 

employees joining in 1990 had/have substantial periods of time 

remaining in their careers, allowing for further growth in their 

retirement savings. As a result of increased company growth 

and profitability following the implementation of the Messer 

ESOP, those additional years would result in a widening of the 

retirement savings gap. 

2. The estimated cost of repurchasing retirees’ shares is projected into the Messer annual valuation model, assuring that 

sufficient liquidity will be available when required. 

3. As a result of the Messer board of directors’ actions with 

regard to dividends, at the end of 2015 the Messer ESOP trust 

assets include a balanced portfolio investment equaling more 

than 25% of the value of the allocated Messer shares; providing 

diversification for the participants and liquidity for share repurchase. 

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Addendum 2 to the Testimony of Peter S. Strange 

April 16, 2016 

Return on Investment 

The Positive Economic Impact of America’s Support for 

Employee Ownership 

For decades the US tax code has contained significant support 

for the creation and success of employee stock ownership plans. In 

1998 the tax code was modified to allow ESOPs to own stock in 

Subchapter S corporations—a significant benefit to further creation 

and growth of ESOPs. A number of studies have validated and 

quantified the big picture benefits of ESOPs and compared ESOPs 

to alternative organization structures. The results of these studies 

include: 

• ESOP companies grow faster, providing higher levels of 

employment. 

• ESOP companies are more resilient, retaining that employment through economic downturns. 

• ESOP companies provide company-funded retirement benefits that result in retiree account balances that are materially 

greater than competing models. 

• ESOP companies have a lower failure rate than nonESOP, private companies, resulting in lower risk to employer 

backed benefit plans. 

• ESOP companies now represent a high level of economic 

critical mass, driving our national economy forward. 

The question remains, ‘‘What is the direct return in tax dollars 

for the investment that our country makes in an ESOP?’’ This simple study of one ESOP company, Messer Construction, quantifies 

that positive return. 

Messer’s ESOP was created in 1990 and Messer became an S 

Corporation taxpayer in 1998. While there are dozens of variables 

that might be studied, we have elected to focus upon two straightforward questions: 

1. What is the level of investment that our fellow taxpayers 

made in support of the Messer ESOP? 

2. What is the direct return in tax dollars resulting from 

that investment? 

OUR APPROACH 

We studied the following data over the fifteen year period prior 

to creation of our ESOP and the fifteen year period following creation of our ESOP: 

- Average growth rate as measured by dollars of revenue. 

- Average profitability per revenue dollar. 

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- Average annual employee count, based upon average revenue dollars per employee. 

- Average salary per employee. 

- Actual retirement account balances in the company-funded 

retirement plans as of 2004. 

After we gathered the data for the two study periods we applied 

appropriate inflationary adjustments so that all dollars were measured as of 2004, the end point of the study. 

We used the following assumptions: 

- A corporate federal tax rate of 35%. 

- A personal federal tax rate of 25%. 

- That, absent the creation of the ESOP, Messer would continue to grow at its historical growth rate during the period between 1990 and 2004. 

- That, being an excellent company, Messer would adopt a 

generous 401k program—100% company match of the first 

2.5% of employee savings, resulting in a total 401k contribution of 7.5% per year, per employee. 

- That the employer and employee contributions to a 401k 

would be tax deductible. 

- That funds held in trust, whether in the ESOP or the 401k 

plan would grow at at-least the rate of inflation, after 2004. 

OUR RESULTS 

Investment received through tax deferral: ($14,203,345) 

Additional taxes paid: $41,807,481 

Net benefit in federal taxes: $27,604,136 

A multiplier of 2.94 in same year dollars! 

THE MATH: 

Question 1: The tax investment: 

For the sake of consistency, we have analyzed the data as if 

Messer and the Messer ESOP had been the beneficiaries of the full 

ESOP benefits, including the S Corporation tax deferral, beginning 

in 1990. All calculations have been normalized to 2004 dollars—the 

end of the study period. 

Messer was a profitable, growing company over the fifteen years 

prior to forming its ESOP. The result of the positive tax code benefits for ESOPs is that Messer’s income tax payments would be deferred until participant retirement. Over the fifteen years prior to 

1990, Messer revenue grew at an average annual rate of 2.26% 

over inflation. Projecting continued growth and profitability at that 

rate for the fifteen years following formation of its ESOP, and assuming that Messer implemented a strong 401k retirement plan, 

the calculated tax deferral would have resulted in an investment 

by US taxpayers of $14,203,345 in 2004 dollars. 

Question 2. Direct return in federal taxes paid—or to be 

paid. 

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With the implementation of our ESOP Messer’s growth trajectory 

changed. Over the fifteen years following creation of the ESOP 

Messer grew at 5.76% over inflation. The marginal growth driven 

by our ESOP resulted in employment growth of an additional 233 

employees over the fifteen year period. Applying the calculated average gross pay to those employees as they entered the payroll, and 

applying the assumed individual tax rate to those marginal employee earnings results in additional federal tax payments of 

$38,719,967 in 2004 dollars. 

The actual account balances for the Messer retirement plans at 

the end of 2004 totaled $71,036,326. The calculated total balances 

in 2004 for a 401k plan that would have resulted from the preESOP growth rate in employment and the assumed total annual 

contributions of 2.5% from the company and 5% from the employee 

would be $58,686,273. With the assumption that the funds held in 

either trust would grow until retirement and mandatory withdrawal at at-least the rate of inflation, the federal government will 

receive tax at the assumed personal rate on the difference between 

the two trust funds, or $12,350,053. At 25% personal tax rate the 

result is additional federal tax payments of $3,087,513 in 2004 dollars. 

Adding the two sources together results in total calculated additional federal taxes resulting from the Messer ESOP of $41,807,481 

in 2004 dollars. 

CONSERVATISM IN THE CALCULATIONS: 

The two direct tax sources calculated above materially understate the actual benefits of the ESOP to our local, state and national economies. Additional metrics that could be added include: 

- The multiplier effect of the added spending by the additional employees, resulting in additional federal tax from the 

profit on their purchases. 

- The savings in federal benefit costs post-retirement resulting from the more robust ESOP retirement accounts. 

- The taxes received at the state and local level as a result 

of the additional employees and their post-retirement spending. 

- The fact that hundreds of employees who receive robust retirement benefits will spend far more post-retirement as compared to receiving the 401k level benefits. 

- The fact that the ESOP is fully funded by the company, resulting in all Messer employees, at every income level, having 

a marginal 5% (the employee contribution to the 401k) to 

spend during each year of employment. 

- The fact that Messer has continued to grow, resulting in 

ever more employment, ever more retirement benefits—and 

ever more federal income tax payments. 

- The fact that, since 2004, the Messer ESOP has actually 

grown at a rate more than double the rate of inflation, which 

will lead to tax payments by participants at withdrawal far 

greater than those indicated in 2004. 

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- The fact that Messer has in place, alongside its ESOP, a 

substantial, voluntary 401k retirement plan, not included in 

our retirement savings calculations. 

- And many more benefits at both the enterprise level and 

at the employee level. 

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Good morning Chairman Chabot, Ranking Member Velazquez, 

and distinguished members of the Committee. My name is Stephanie Silverman and I am the President and Executive Director of 

the Employee-owned S Corporations of America (ESCA). Thank you 

for the opportunity to testify today about the success of S corporations that are owned by their employees—so-called ‘‘S corporation 

ESOPs’’—and on bipartisan legislation that would expand employee ownership and in doing so generate significant new economic benefits to workers, companies and communities around the 

country. 

ESCA represents S corporation ESP companies operating in 

every state, in industries ranging from heavy manufacturing to 

constructions to grocery stores to school photography. There are almost 3,000 ESOPs in the U.S. accounting for $92 billion in direct 

economic output. The top four industries by employment are manufacturing (94,000), professional services (80,000), retail trade 

(73,000) and construction (48,000). 

It was twenty years ago that, thanks to the efforts that began 

with discussions in this committee, Congress ultimately passed legislation creating S corporation ESOPs. Congress’ goal in 1996 was 

to encourage employee ownership of private industry, enable workers to benefit from their labor, and create a path for building meaningful retirement savings. Data shows that today, S ESOPs are 

doing exactly that. I’m here to report that Congress did something 

very right. Twenty years later, private employee-owned companies 

have been a remarkable success story, a bright spot in an economy 

characterized by sluggish growth, anemic job creation, and worker 

insecurity. 

Many studies, including those by renowned economists from 

across the ideological spectrum, tell the story about how S ESOPs 

are powerful for workers as a retirement savings and economic security tool, and how they have contributed substantially to communities and the broader national economy. I will just touch on a few 

key points from the most recent studies: 

• Earlier this year, economist Jared Bernstein, formerly Vice 

President Biden’s chief economist, released a study that shows 

that ESOPs reduce wage and wealth inequality. Moreover, 

Bernstein found, ESOP companies pay their workers better 

wages and provide them with more stable employment than 

other businesses. With Congress searching for solutions to improve savings rates as well as job prospects and wages for 

American workers, ESOPs tell us that we can achieve this goal 

by increasing capital ownership among our workers. 

• At a time when almost half of working Americans do not 

have any retirement plan at work, ESOPs also provide unparalleled retirement savings opportunities for many workers. 

Employee-owners are able to amass more retirement savings if 

they are in an ESOP. Indeed, EY’s Quantitative Economics and 

Statistics practice found that, from 2002-2012, S ESOPs outperformed the S&P 500 in terms of total return by participant 

by 62%, net assets increased over 300%, and distributions to 

participants totaled nearly $30 billion. 

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• The additional savings benefit to employees also does not 

come with additional risk to them: S ESOP companies are a 

safe investment for their employee owners as private, employee-owned businesses are proven to be more stable than 

their counterparts. In June 2014, the National Center for Employee Ownership released data showing that the default rate 

on bank loans to ESOP companies during the period 2009-2013 

was, on average, an unusually low 0.2 percent annually. This 

compares to mid-market companies defaulting on loans at an 

annual rate of 2 to 3.75 percent. 

• Finally, it’s worth noting that in ESCA, nearly 80 percent 

of our companies offer not just ESOP-based savings, but at 

least one other defined benefit or defined contribution plan. 

About eight years ago, as Members of Congress began to hear 

from companies and workers in their districts the tremendous benefits of employee-owned companies, they began asking, ‘‘What can 

Congress do to encourage more ESOPs, and with them more savings, job security and wage equality?’’ 

The answer to that question prompted what is currently H.R. 

2096, the Promotion and Expansion of Private Employee Ownership Act. First introduced by Congressman Ron Kind in the 111th 

Congress, the bill has been introduced in the next three Congresses, and led by Congressman Dave Reichert and Kind. Last 

April, Congressman Reichert and Kind were joined by six additional members of the House Ways and Means Committee as original cosponsors of HR 2096—Reps. Tiberi, Neal, Boustany, 

Blumenauer, Paulsen and Pascrell. Today, that measure has 67 cosponsors, including 21 members of the Ways and Means Committee. In the Senate, the counterpart measure—S. 1212—has 28 

cosponsors, including 8 members of the tax-writing Senate Finance 

Committee. 

In short, it would: 

• Provide incentives to owners of existing S corporations to 

sell their stock to an ESOP. Today, such incentives exist only 

for owners of C corporations: Section 1042 of the Tax Code allows a C corporation owner to defer the recognition of gains 

when the owner sells shares to an ESOP when the proceeds 

are reinvested into other securities. Extending parity to S corporation owners is the most significant legislative action that 

Congress could take to encourage more of the millions of S corporation owners to choose an ESOP when they consider how to 

transition their business from their current ownership. 

• Encourage banks to lend to S ESOPs for the purpose of 

creating more ESOP ownership of a company. Under this proposal, banks could deduct 50% of interest income received on 

certain loans made to an ESOP. This incentive is vital because 

employees often lack the funds to buy the company directly, 

and not all banks understand the ESOP structure, which may 

cause them to limit their lending to these vibrant businesses. 

• Provide assistance to would-be S ESOP companies by providing for an S Corporation Employee Ownership Assistance 

office at the Department of Treasury that can aide business 

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owners who may be interested in forming an S corporation 

ESOP and, finally, 

• Permit an SBA-certified small business to remain eligible 

for SBA programs after becoming majority-owned by an ESOP 

as long as employee demographics remain the same. 

Quite simply, more S ESOPs means more worker savings, wealth 

and wage equality, job stability and national economic benefit. 

That is why we hope this Committee and your colleagues in Congress will help advance this vital measure. 

CONCLUSION 

Mr. Chairman and committee members, on behalf of ESCA and 

the thousands of employee-owners from our member companies, as 

well as the almost half a million Americans who work for S ESOP 

companies today, we thank you for holding this hearing to highlight the savings and other economic benefits of S corporation 

ESOPs and employee ownership. We look forward to working with 

all of you to grow support for and move H.R. 2096. I would be 

happy to answer any questions. 

Æ 

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