Most U.S. companies with employee stock ownership plans (ESOP) are outperforming competitors without them and beating publicly traded indexes, but direct employee ownership remains a rare phenomenon in the private sector and is scarcer on Wall Street.

In the last 18 years, only 3,300 private and public companies have turned to this model, but the next decade could see an increase as baby boomers with businesses search for exit strategies and ESOP companies continue their success. Business brokers estimated 65 percent to 75 percent of the small companies in the U.S.—about 10 million—likely will be up for sale in the next five to 10 years, with boomers leading the surge.

However, financing an ESOP is extremely difficult and particularly costly in today’s credit markets. ESOPs typically are created through a leveraged or financed buyout or acquisition, although seller-financed ESOPs are becoming more popular today—a testament to credit gridlock.

“Companies are putting it on hold for a little while,” said Loren Rogers, project director at the National Center for Employee Ownership (NCEO) in Oakland, California.

While ESOPs have historically struggled to find a place in corporate America, advocates point to the growth of them in the last decade. In 2008, the NCEO estimated 11,400 companies offered ESOPs, up 21 percent from 9,400 in 1999.

St. Louis-based McCarthy Building Cos. has been a family-run outfit for much of its 164-year history. In 2002, chairman and CEO Mike McCarthy sought an exit strategy that didn’t include selling the firm to a competitor or a foreign company. After researching options, he decided an ESOP was the ideal model. To finalize the structured buyout, the new management team secured an $18 million loan to buy 30 percent of the company and then converted its profit-sharing program into an ESOP.

“We wanted this to be a best-in-class company so we could attract the best people,” said Bo Calbert, president of McCarthy’s Southwest region. “But you have to have a program to attract great people.”

Now McCarthy is 100 percent owned by its employees and contributes 19 percent of each worker’s salary to the ESOP. Its employee stock price jumped from $6.85 in 2002 to $36.35 in 2008, a year that brought record revenue of $3.5 billion. ­Since the company is not publicly traded, the value and stock price is independently appraised by an auditor approved by the U.S. Department of Labor. The stock price is appraised at the end of the year, so no price was available for 2009.

A 2008 study by the City University of New York, which gathered data from 328 ESOP firms and more than 2,000 non-ESOP companies, found that sales-per-employee were 8.8 percent, or $44,500, higher in ESOP companies. The report surmised a typical 200-person ESOP firm would bring in nearly $9 million more than a non-ESOP competitor.

A 2007 joint study by the ESOP Association and the University of Pennsylvania relying on 30 years of research found that ESOP firms experience more productivity, profitability, and longevity.

Proctor & Gamble has operated the oldest profit-sharing plan in the country for more than 120 years. The original plan was established in 1887 and the ESOP portion in 1989 when the global giant borrowed $1 billion to purchase Convertible Class-A preferred stocks.

Tom Mess, P&G's director of U.S. benefits, said employee ownership helps attract and retain top talent. The company’s 135,000 employees are eligible to participate after one year, and receive contributions based on salary and tenure.

“To encourage top talent to stay with P&G, the company offers a variety of benefits that increase or become available with years of service,” Mess said. “This is important as we attract young talent at P&G.”

In fiscal 2009, which ended June 30, the Cincinnati firm reported diluted net earnings per share of $4.26, up 17 percent from the prior year. Net earnings were up 11 percent to $13.4 billion.