[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

                               __________

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            Small Business Committee Document Number 114-058
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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:

           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 non-ESOP, 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.

          - 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:

           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.

           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 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.

                                 [all]