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Normal employee rewards such as wages, pensions, health benefits are worthwhile but they fail to give the employee a chance to participate in the wealth their efforts help produce.

Consequently, many fail to connect their work habits with the success of the company.

ESOP has proven to be logical means of giving the employee a "stake" in the enterprise he works for. The results, at least in our case, is that he begins to take an increasing interest in the success of his company and his contribution improves accordingly.

One shortcoming of the program is that the rewards of ownership do not pay off until the employee retires or leaves his job. This makes the appeal of the program less for the younger person.

Granting a company the right to pay dividends on stock held by the ESOP from pre tax earnings, provided the dividends were passed through to the employees, would make the ESOP of current benefit to the employee and increase the appeal of stock ownership.

The popularity of ESOP and employee stock ownership generally is on the increase. Action taken by the Senate Finance Committee and eventually the Congress to increase the attractiveness of ESOPs would give further impetus to this trend—which in my opinion is one of the healthiest developments in recent years for the free enterprise system.


My name is John P. Grady. I am President of Juice Bowl Products, Inc., a canner of single strength juices and juice drinks.

Our company is privately held with approximately 78 percent of the stock being owned by myself and my family and 22 percent of the stock being held by the Juice Bowl Employees Stock Ownership Trust.

The company is 10 years old and has grown during that time from sales of approximately 2 million dollars in our first year to 22 million dollars in our most recent year.

In a competitive business such as ours, it is the people in the company more than the financing, the processing techniques, or the uniqueness of the product that makes the difference between success and failure.

How does the owner of such a company share the rewards with all of the people who have helped build a successful enterprise. How does he recognize the contribution of a shipping clerk who never considers his day finished—who takes the same pride in a satisfied customer that the owner does, and who worries just as much about a dissatisfied one?

How does the owner reward the employee who comes in three hours early to fix a machine that would have cost 50 percent of the daily production if he had reported at the regular time? What about all of the employees who have done things over and beyond the narrow definition of their jobs.

The owner cannot, as a practical matter, pay them more money than his competition pays or his costs and prices will be out of line. He can thank them, of course, but that becomes pretty hollow after a while when the corporate equity is growing and the employees reward is limited to his pay check and perhaps a modest pension program.

Stock bonuses might be given, but the employee would pay taxes on them out of his current income, would probably get no dividends, and would have no market for the stock.

We thought we had solved our problem at Juice Bowl Products with a profit sharing trust, but somehow it never worked out. There was no direct connection between company growth and the employees interest in the trust. Also, the intestment of trust assets was a problem. What happened to the money was dependent upon outside factors and the employees themselves had no influence over it.

It was in 1972 when I first learned about Louis Kelso and his Employee Stock Ownership Plan. A few weeks later, I was in San Francisco and spent the better part of an afternoon listening to the views of this man who I firmly believe has a clear vision of the kind of changes that are needed in the ownership of companies if capitalism, as we know it, is to survive.

The result of that talk was that on August 1, 1973, Juice Bowl became the first company in Florida to have an approved ESOT plan. Next month we will make our fifth contribution to the Stock Ownership Trust. At that point, our employees will own something over 20 percent of the company. Besides the ownership itself, the value of the shares owned have appreciated substantially from the basis on which they were acquired. Trust assets have grown from $150,000 to over -$1,000,000.

Currently over 75 percent of the assets of our Trust are invested in company stock and the balance in cash and other equities. The stock is reappraised annually and the growth of the employees balances have amounted, between company contribution and appreciation, to about 23 percent of their total earnings each year. We do not have a formal retirement plan at Juice bowl. However, projections indicate that the ESOT will end up doing a much superior job for our people.

The opportunities to develop a real feeling of team effort through ESOT appear to be endless. There is no employee who is not in a position to make the company better if he is really motivated to do so. There is no one from the bottom man on up who cannot improve his contribution if he is constantly on the lookout for opportunities to do so.

The key is to unleash this extra thought and extra effort that is hidden away in every employee. We think ESOT does this. In the area of cost, quality control, cost reduction, customer service, and all the other places where it takes extra effort on the part of everybody to get the job done, we can see tangible progress.

When a careless forklift driver spoils $15 worth of product, everyone who witnesses this, knows that they too share in the loss. Down time on a high speed production line is no longer a chance for an extra rest break. Instead, it is lost earnings which affect everyone's investment. Recently, we had a campaign to solicit cost savings ideas and received over 200 sound suggestions. There were no prizes offered—only the recognition of a good idea. We feel that most of our people are genuinely interested in their company and its progress, and that kind of an attitude is good for them, good for our customers, and good for our stockholders.

Perhaps the biggest weakness sn the ESOT program, as it currently exists, is that the material rewards are too far in the future for the younger workers, particularly, to become excited about.

We have thought of paying quarterly bonuses that would be tied to shares of stock held by the Trust in order to give our employees a feeling of the benefits of ownership right now.

Our tax accountants have discouraged us for fear that the IRS would treat such payments as dividends.

It is my feeling that the proposal to permit ESOT stock to receive tax free dividends would add a valuable new dimension to ESOT. Quarterly dividends checks which would increase hopefully over the years as the employees balances increased would do a great deal to make the program more timely from the standpoint of the employees—especially the younger ones.

I have worked in six organizations over the past 35 years. These have all been fine companies with pension plans, selective employee benefits such as stock options and bonuses, and all the trimings of modern personnel management. I can tell you, however, with great personal satisfaction that the degree of teamwork and employee cooperation that exists at Juice Bowl since we adopted an ESOT plan is of a significantly higher order than I have experienced elsewhere.

Increased Employee Stock Ownership, regardless of how it is accomplished, is a health trend in our economy. The ESOP program is a unique way to enable all of the employees of a company to participate in its ownership.

I believe that favorable action by this committee on the ESOP legislation before you will give a significant boost to an already growing trend to spread the ownership of American industry among more and more people. Thank you very much.

The CHAIRMAN. Next, we will call one of our members, Mr. Mike Gravel, to

Senator GRAVEL. Mr. Chairman, could I just put my statement into the record? It is carrying coals to Newcastle to read it to you, and I would like to hear comments by these other witnesses. I know you

have an obligation at 12 noon and so I would like to put my statement in tle record.

The CHAIRMAN. I assure you, Senator, I will read every word of it.

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[The prepared statement of Senator Gravel follows:]


Mr. Chairman: I want to talk about six trillion dollars. That is a rough estimate of the capital growth our economy will experience before the turn of the next century. The question we must ask ourselves is who will own this six trillion dollars? If we do not take some dramatic action soon it will be the same people who own our existing wealth; it will be the wealthiest 5 percent of our people who today control 50 percent of our wealth, it will be the same 1 percent which owned 25 percent of America in 1925 and who own 25 percent today, the same 1 percent who own 60 percent of all corporate bonds, 50 percent of all corporate stock and receive half of all corporate dividends paid in America. I repeat, half of all corporate dividends paid in America today go to 1 percent of the population. Unless we act soon the years will pass with the rich getting richer, and when nothing has changed by the year 2000 the nation will have us to blame.

Mr. Chairman, you have been the leader in addressing this vexing issue of capital concentration. I have lauded and supported your efforts. The employee Stock Ownership Plan, the TRASOP, and a range of other ESOP legislation was an important first step in the expansion of capital ownership. But, the ESOP alone is not sufficient to prevent the continuing concentration of American wealth. Its contribution limitations and narrow focus on employees does not allow for rapid expansion of stock ownership.

In order to effectively address the question of "who will own America's new wealth" we must adopt new programs with broader focus. We must move beyond programs benefitting employees exclusively, and we must do it soon. I have introduced a bill, S. 3223, which would allow the more rapid expansion of capital ownership in America. This bill provides for the expansion of stock ownership plans beyond employees to the general public and therefore I refer to it as the General Stock Ownership Plan.

The General Stock Ownership Plan would he sponsored by state governments, but would not involve state ownership. Indeed, the GSOP concept has become inportant to me and my state as an alternative to state ownership of private industry. The GSOP merely allows the use of a states' credit power to build equity ownership into its citizens.


1. A state government would establish a trust to hold and distribute stock to the people of the State.

2. Each resident of the state would have an equal interest in any stock acquired by the trust.

3. The trust would borrow money to invest in corporate stock.
4. Earnings from the investment would be used to pay off the loan.

5. The stock would be distributed to the individual beneficiaries, the citizens of the state, putting equity ownership and dividend income into the citizens' hands.

In putting legislative flesh on the GSOP bones I was aiming at two goals, rapid amortization of acquisition financing and the vesting of actual ownership in the hands of the citizens. To accomplish these objectives S. 3223 changes various provisions of the tax law with respect to a General Stock Ownership Plan adopted by a state. I would like to run down briefly the changes made by S. 3223 and then explore how these changes and the GSOP concept interface.

The major changes wrought by S. 3223 are as follows:

1. A new type of tax exempt trust may be created by the state to hold GSOP stock and act on behalf of the states' citizens to borrow money; buy, hold, and distribute stock, and pass through dividends.

2. Dividends and other payments by a corporation on stock held by the trust are deductible to the corporation (eliminating the corporate tax on these payments).

3. The trust must annually pay out all dividends received. The dividends can be used for trust expenses, debt retirement, or they may be passed through to the citizens of the state. Dividends would be taxable to a citizen/beneficiary when received from the trust.

4. The trust will hold stock on behalf of each citizen of the state and must distribute out the participants' stock upon request after the participant has been in

the plan for five years. Upon this distribution the recipient citizen has no tax liability.

5. However, when the citizen beneficiary sells his distributed stock he is taxed at ordinary income rates on the full proceeds of the sale.

6. The GSOP may use tax exempt bonding in its financing.

Much of what the GSOP does could be accomplished under existing law. It would merely require direct state ownership of the profitable enterprise with distribution of profits through a refundable state income tax credit. But this approach would not put real ownership in the hands of individuals and would put control of the investment in the hands of bureaucrats. The GSOP proposal by passing through voting rights on the trust stock puts control in the hands of the people who have an economic interest, rather than a political interest in the viability of the enterprise.

Our economic system is in deep trouble. Millions of our people do not have sufficient incomes to keep body and soul one. With the laudable goal of aiding these unfortunate many we have developed an incomes policy to provide a minimal standard of living. But, this incomes policy, paying government income to people unable to earn their way, costs money. To finance it we raise taxes, we take income away from producers and pay it to those who cannot produce. We transfer income, and this income transfer by the federal government has grown from $32 billion in 1967 to $188 billion in 1977. The burden of these programs threatens to swamp us and we look for ever more ingenious tax devices to raise the necessary funds. In final surrender we accept that an annual budget deficit of "only" $50 billion is acceptable. It is time for us to move away from playing Robin Hood. If our economic system is allowed to operate properly we need not take from the rich and give to the poor. If we develop programs such as the one I am suggesting the poor, even without jobs, would have sufficent income from capital to survive without transfer payments.

Let me show you what a GSOP might mean to Americans even on a limited scale. Assuming the adoption of my bill and the creation of a GSOP trust by the State of Alaska we might find the following:

1. The trustees negotiate for purchase of an interest in the Trans Alaska Oil Pipeline. Based on original cost and interest on equity it is not unreasonable to hypothesize that an interest of 15.8 percent could be purchased for approximately $1.5 billion.

2. To finance this purchase the GSOP issues $1.5 billion of tax exempt bonds. Moody average interest rate for all such bonds outstanding in March this year was about 5.5 percent. Annual debt service for the trust would then be about $123,820,000. The actual purchase would be made by a corporation organized by the trust and capitalized with the proceeds of the $1.5 billion loan to the trust.

3. Based on data filed with the Federal Energy Regulatory Commission by British Petroleum a 15.8 percent interest in the oil pipeline can be expected to generate annual revenues of $406,794,000 with the current tariff of $6.35 per barrel and the allocated throughout of 64 million barrels per year.

4. The costs of operation are projected by BP to be approximately $80,452,000 annually.

Using these numbers we find that if the corporation paid all its income to the trust (and therefore incurred no tax liability) after debt service each and every citizen of Alaska could receive a dividend check of $500 per year. And once the debt was retired this dividend could jump to over $800 per citizen per year 1978 dollars.

Now I understand that $500 per year may not mean much to many of you, but in parts of Alaska where the per capita income is less than $3,000 per year it can make a significant contribution. And this is just the beginning. Based on the same data a GSOP with a $10 billion investment (less than the projected cost of the proposed Alaska Gas Line) could guarantee $13,332 per year for a family of four. In addition to this income the family would own a block of stock which becomes more and more valuable as the debt is retired. They can borrow against it, use it for their financial statements so important in buying a home, and pass it on to their children. They may even sell it to cover catastrophic expenses if need be, just like you and I can do with our assets.

This proposal has been criticized as being state ownership. It is not. Ownership and control of the enterprise lies with the citizens voting their stock as any other shareholder. The potential for conflict exists between the GSOP and the sponsoring state government. It is with forethought that this is so. I am trying to create conflict and institutionalize it at an acceptable level. In fact, this conflict presently exists between the government, in its role as regulator of our economic institutions, and those institutions themselves as they seek to perform, in an unfettered manner, their economic functions of allocating resources by rewarding productivity.

Unfortunately, the government is all powerful and at times oppressive. The excessive growth of government can be mitigated if we give the individual citizen a greater role in our economic institutions. With a stake in our economic success, the citizen may choose to exercise his collective power over government, which is absolute in a representative society, to stop it from excessive and harmful regulatory activity. By keeping the decision making power at the individual level we assure more checks and greater balance between those who govern and those who are governed.

In America there is a direct link between the capital concentration and the malaise which has stricken our economy. In order to address the economic injustice which is the symptom of high concentration of wealth the government pursues policies which hinder economic development. To achieve economic equity we transfer income from the upper and middle classes to the poor. We are faced with the dichotomy of cutting taxes for the rich to encourage capital investment and economic growth because they are the ones with the most capital to invest thereby insuring that they will continue to be so. At the same time we create nonproductive, noneconomic jobs and preserve existing but inefficient jobs because a majortiy of our people still reply on labor for their incomes. We have pursued policies which cannot help but bring about the demise of our economic system.

The fact is that the crisis in our economy today is tied directly to our attempts to treat an economic disease, insufficient income by attacking the sympton of insufficient jobs rather than the cause, a lack of capital diffusion sufficient to produce income for all our people.

As I said before, we must get moving. The key to both economic health and economic equity lies in spreading the ownership of the productive instruments of our society: our corporations. We can begin to treat the root of our problems if we can spread among all citizens the ownership of the companies which produce the nation's wealth. The General Stock Ownership Plan is one means of achieving this widespread ownership without confiscating the property of the wealthy and without creating a monolithic socialist state. It is up to us Gentlemen, who will own the next $6 trillion of America's wealth. The General Stock Ownership Plan is a step toward assuring that a large proportion of that new growth goes to a new group of capital owners.

I would like to take just a moment to address another bill which I have introduced and which is relevant to our discussions during this hearing. The bill is S. 3291 and it increases the contribution limitations for ESOPs from 25 percent of payroll to 50 percent of payroll. This bill raises a question as to the nature of the ESOP. ESOPs developed under the qualified pension provisions of the Internal Revenue Code in order to take advantage of tax exempt trust and the deductibility of employer contributions. However, the ESOP is not primarily a pension plan, but a means of broadening the ownership of American capital wealth. As such, the contribution limitations adopted from qualified retirement plans are inappropriate. By expanding these contribution limitations on ESOPs we make these plans a more flexible tool for the leveraged acquisition of stock on behalf of employees in small and medium size companies. Adoption of this legislation would be a small, but important step in encouraging the broadening of stock ownership through Employee Stock Ownership Plans.

The CHAIRMAN. We will next call Mr. Ronald L. Ludwig, Counsel for the Employees Stock Ownership Council of America.

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PLOYEE STOCK OWNERSHIP COUNCIL OF AMERICA Mr. LUDWIG. Good morning, Mr. Chairman, and other members of the committee.

I am Ronald Ludwig, a San Francisco Jawyer. I am here today representing the Employee Stock Ownership Council of America. With me is Mr. Robert Smiley, president of the ESOP Council.

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