Building Construction Employee Loyalty with ESOPs

In the construction industry, “Help Wanted,” really means “Help Needed. Desperately.” As a construction leader, the foundation of your business is your people. According to the U.S. Chamber of Commerce, the construction industry is currently short 200,000 to 300,000 workers,[1] and, in booming markets, the competition for solid, skilled labor is more competitive than ever. Complicating matters, the U.S. Department of Education estimates that four out of 10 U.S. construction workers are expected to retire by 2031.[2] A recent USA Today article stated that about 10 percent of the infrastructure workforce – about 1.5 million people – will permanently leave their jobs every year over the next decade.[3] Of course, you can try offering higher salaries, a risk that could impact cash flow or result in layoffs in lean years.

So, what incentive can you offer employees to not just join you, but to stay — especially if you want your business to continue when you decide to retire?

An Employee Stock Ownership Plan (ESOP) might be a strategy for you.

What is an ESOP?

ESOPs are employee benefit plans that buy a portion of shares of your construction company for employees that become vested over time, a trust to hold stock for the benefit of your employees. These programs give your employees a share of the company, a true sense of ownership and the opportunity to directly benefit from the success of your organization.

ESOPs and employee loyalty

If you are looking for incentives to help you recruit, engage and retain top talent, ESOPs are proving popular. A recent Rutgers University study[4] found that ESOPs with majority employee ownership in all industries outperformed other companies during 2020 and were three and four times more likely to retain staff.[5] In the construction industry, many workers have not had the opportunity to efficiently participate in a retirement plan, but ESOPs allow you to offer an alternative retirement strategy to your teams. And as you look to bring in new talent to help your company grow, owning a share of your company can be an attractive bonus.

ESOPs for your exit strategy

ESOPs may benefit not just your employees, but the vision for your company’s future as well. Past trends have indicated that construction companies that are not publicly traded will experience an ownership transition every 25 to 30 years. However, if you are among the population of owners considering retirement in the next five to 10 years[6] — and there are many of you— the pace of those transitions is increasing.

Your business reflects a lifetime of demanding work, and it is understandable to wish those values to continue. ESOPs help to facilitate that goal when selling to a third party or merging with another entity does not. With an ESOP, you will have the opportunity to establish your legacy and help provide for the future of your employees that have helped make your success possible. Establishing an ESOP can also help facilitate a smooth transition for when your company does change hands, either on your timeframe or unexpectedly. Depending on timing, ESOPs also provide you with the opportunity to control your involvement as the company moves forward. Instead of divesting completely, you can continue to lead your organization throughout the transition and beyond.

ESOPs and taxes

Beyond the benefits of control and rewarding team members, ESOPs offer multiple tax advantages. For C-corporations, contributions made to ESOPs are tax-deductible and, for S-corporations, the portion of profits attributable to the ESOP is tax-exempt from federal and most state income taxes. Your employees are not taxed on the contributions made to an ESOP. Employees will pay tax on the ESOP distributions when they withdraw the money in retirement.

A recent study by one of President Biden’s House Council of Economic Advisors examined the benefits of ESOPs and proposed strategies for encouraging more companies to create them,[7] but it remains to be seen if those strategies will result in additional tax incentives for business owners.

How DHG can help

While popular, ESOPs are not ideal for all companies. You should seek guidance from consultants experienced in the complexities of these programs to evaluate what is best for your company and help design the right transition template for your specific business.

DHG can provide that guidance. By integrating our technical knowledge with our experienced involvement with the construction industry, DHG can provide you with a comprehensive evaluation of how an ESOP may or may not benefit your business and employees.

To begin a collaboration, please reach out to DHG Assurance at assurance@dhg.com.


[1] https://www.uschamber.com/report/the-america-works-report-industry-perspectives

[2] https://www.enr.com/articles/51865-military-recruitment-tactics-that-could-solve-constructions-skilled-labor-shortage

[3] https://www.usatoday.com/in-depth/money/2021/06/03/biden-aims-create-jobs-with-infrastruture-plan/7489192002/

[4] This study was funded by the Employee Ownership Foundation.

[5] https://employeeownershipfoundation.org/sites/eof-master/files/2020-10/EOF_CovidResearch_Oct23b.pdf

[6] https://www.fminet.com/wp-content/uploads/2017/09/OTMSSurveyReport_2017_WEB.pdf

[7] https://esca.us/wp-content/uploads/2021/01/Why-Arent-There-More-by-Jared-Bernstein-January-2020.pdf

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