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[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]

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

__________

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

Small Business Committee Document Number 114-058
Available via the GPO Website: www.fdsys.gov

___________

U.S. GOVERNMENT PUBLISHING OFFICE
20-073 WASHINGTON : 2016

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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 VELAZQUEZ, 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

C O N T E N T S

OPENING STATEMENTS

Page
Hon. Steve Chabot................................................ 1
Hon. Nydia Velazquez............................................. 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,
Employee-Owned 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,
Employee-Owned S Corporations of America, Washington, DC... 49
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
None.

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, Velazquez, 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 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. Velazquez, for her
opening statement.
Ms. VELAZQUEZ. 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.
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 Simpson-Bowles 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. VELAZQUEZ. Thank you, Mr. Chairman. It is my pleasure
to introduce Ms. Stephanie Silverman, president and executive
director 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 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 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 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 Velazquez
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 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. Employee-owners 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. Employer-owners 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
employee-owners 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 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 Velazquez, 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.
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 Velazquez, 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
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
Velazquez 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 SBA-certified small business
to remain eligible for SBA programs after becoming majority-
owned by an ESOP.
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.
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. VELAZQUEZ. 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
owners 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. VELAZQUEZ. Mr. Brill, do you have any comments?
Mr. BRILL. No, I do not.
Ms. VELAZQUEZ. 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. VELAZQUEZ. 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 Velazquez, 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. VELAZQUEZ. So do you agree with me that section 6 of
the bill is not enough?
Ms. SILVERMAN. I agree with you that we would love to work
with you on an expansion that includes more companies. Yes.
Ms. VELAZQUEZ. 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. VELAZQUEZ. 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 percent 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
Velazquez, 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 address 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
combination 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 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
Velazquez. 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 evaluative 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 Velazquez 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, 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.]
A P P E N D I X

[GRAPHIC] [TIFF OMITTED] T0073.001

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 company-funded 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. 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.
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 company-funded 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.
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:

<bullet> ESOP companies grow faster, providing higher
levels of employment.

<bullet> ESOP companies are more resilient, retaining
that employment through economic downturns.

<bullet> ESOP companies provide company-funded
retirement benefits that result in retiree account
balances that are materially greater than competing
models.

<bullet> ESOP companies have a lower failure rate
than non-ESOP, private companies, resulting in lower
risk to employer backed benefit plans.

<bullet> 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.

- 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.

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 pre-ESOP 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.

- 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.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

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:

<bullet> 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.

<bullet> 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.

<bullet> 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.

<bullet> 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:

<bullet> 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.

<bullet> 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.

<bullet> 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 owners who may be
interested in forming an S corporation ESOP and,
finally,

<bullet> 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.

[all]
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