Employee ownership refers to much more than a single corporate structure or management philosophy, and its effects on companies, employees, and even surrounding communities can be wide-ranging.
Employees can share company ownership in several ways that extend beyond stock purchases or options. Employee ownership trusts (EOTs), worker cooperatives, and employee stock ownership plans (ESOPs) all offer means for employees to share in the ownership of the company where they work.
Within this spectrum of employee ownership structures, there are differences. In fact, just from one company to the next, the employee ownership can have different impacts. One company may thrive under its chosen model; other business owners may experience problems with employee owned companies.
Most businesses choose to become employee owned based on potential advantages to multiple company stakeholders — both the selling business owners and subsequent employee-owners. But no single business structure is perfectly suited for all companies, and often in business, advantages require certain trade-offs.
In this article, we’ll take a look at some employee-owned companies’ pros and cons across several models — not only ESOPs, but also worker cooperatives and EOTs.
- Pro: Shared ownership stakes can have the power to inspire employee motivation. By aligning the company value more directly with the work employees do, employee ownership transforms workers into worker-owners. That can change employees’ sense of agency and purpose, which can have a real-life impact on the way they feel about the work they do.
- Con: Simply changing a company’s ownership structure is not enough to inspire and foster a culture of ownership across the organization. In fact, it takes commitment, time, energy, and ongoing training and communication to cultivate an effective ownership culture.
- Pro: Employee ownership models can help maintain stability throughout the process of succession planning and owner exit. In an ESOP, for example, the business owner selling to an ESOP trust can control their exit from the company, staying on as long as they choose, to ensure a smooth transition for all stakeholders, including employees, customers, and vendor-partners.
- Con: For business owners looking to accept a check and walk away, employee ownership models may not offer a carefree exit strategy. Owners who sell to an employee-owned structure (like an ESOP or EOT) are often deeply and personally committed to their businesses. Their relationships with employees, customers, vendors, and communities may keep them closely involved (and, yes, employed) after the sale.
- Pro: Employee-owners generally earn higher wages than non-owner workers. Across all wage levels, a 2017 study reported that employee-owners earned a median of 33% more than their non-owner counterparts.
- Con: Ownership does not automatically equal control. Differences in employee ownership structures place different levels of control in the hands of employee owners. In a worker cooperative, for example, employee-owners can buy into the company with their own money, and member-owners have equal, democratic voting power — while employees at an ESOP have an ownership interest, but often do not have voting rights.
- Pro: Some employee-owned companies offer a tax-deferred employee retirement plan, a benefit that’s been proven to increase wealth for lower- to mid-level earners in the U.S. The 2017 study referenced above found that millennial employee owners not only enjoyed higher wages and greater job stability than non-employee owners, but they also reported significantly higher (92%) household wealth than non-owner workers. Even at low to mid-level wages, employee-owners are able to build more family wealth than non-owner workers.
- Con: The ongoing repurchase obligation of some employee-owned companies can create cash flow challenges. As employees near retirement or long-term employees leave, ESOP companies can end up with significant employee stock repurchase obligations. But this doesn’t have to create a crisis; working closely with an expert from the initial planning stages can enable ESOPs to plan in advance and prepare for repurchase obligations.
Understand how repurchase obligations affect the future of your ESOP company with an ESOP PROSTM Sustainability Study.
- Pro: Research demonstrates that ESOPs effectively help shrink wealth gaps based on gender and race. Research shows that those low- and moderate-income ESOP employees have significantly more wealth than their counterparts at non-ESOP companies, across racial groups and genders.
- Con: Employee ownership’s progress toward closing wealth gaps based on race and gender is not complete. Employee-owners of color earn more than non-owners of color, but there remains significant work to do before equity is achieved, and women and people of color achieve parity with white, male employees.
- Pro: Since employees are company owners, decision-making must serve their best interest as owners. In a worker cooperative, this means democratic voting processes. In an ESOP, this means that the ESOP trustee is obligated to protect participants and act as a fiduciary for the company.
- Con: Depending on the size of the company, consensus building can take time, which could lead to missed opportunities or lost efficiency. This is a greater concern with the democratic governance of worker cooperatives than it is with other types of employee owned companies.
- Pro: Employee-owned companies are resilient, and retain more employees when times get tough. A recent study reported that majority ESOP businesses were three to four times more likely to retain employees during initial COVID lockdowns than non-ESOP companies.
Also read: Do Employee Owned Companies Grow Faster Than Competitors?
- Con: Ownership rights of employees can vary, and it takes investment in communication to make them well understood. It’s up to management to take the reins and communicate what a transition to employee ownership means for the company and for employees in both the short and longer terms. Experts in third-party management can offer guidance and services to help companies achieve their employee-owned cultural goals.
- Pro: There are employee-owned company structures to meet the needs of virtually any size business. While certain structures, such as ESOPs, require a relative minimum size to be a good fit, other options may fit the bill for smaller companies.
- Con: The complexity of some employee ownership structures requires specialized guidance and planning. ESOPs, for example, are regulated by the Internal Revenue Service and Department of Labor, and compliance requires diligence and a level of expertise that calls for expert help.
The truth is, many aspects of business management require the help of experts. From taxes and accounting to legal and even concerns about buildings and real estate, companies rely on specialized guidance and service providers to make the best choices for their business, and to ensure they’re getting the best benefit from those decisions.
Many companies discover that employee ownership does much more than provide a straightforward exit strategy for business owners looking to sell. Employee ownership can introduce a new dynamic and sense of shared mission, which can truly become a unified culture that strengthens and grows a business over time. And the best way to determine whether it’s right for you and your company is to learn more. Get a closer look at whether your company may be a great match with our quiz, Is an ESOP Right for You? Just click the link below to get started.