Spectrums of employee ownership

This story first published in “Celebrating Employee Ownership,” a special section that celebrates employee ownership during National Employee Ownership Month.

Employee ownership comes in a few different models, but researchers agree that they yield positive effects for workers and employers.

Employee Stock Ownership Plans (ESOPs), Employee Ownership Trusts (EOTs) and cooperatives (co-ops) offer different ways for employees to acquire life-changing wealth — and in some cases have a say in company decisions.

“Our research finds that employees in companies with significant employee ownership and profit sharing are more loyal and more committed to the company and less likely to leave,” said Joseph Blasi, director of Rutgers University Institute for the Study of Employee Ownership and Profit Sharing.

In the United States, the ESOP is the most common form of employee ownership. There are 6,247 across the country, yielding an estimated $2.09 trillion in employee wealth, spread across about 10.7 million workers, according to Blasi. The average wealth per employee is about $164,946.

An ESOP is a form of employee ownership that is a federally qualified retirement plan. This gives employees federal tax benefits, as well as state tax benefits in certain states. Iowa passed a law in 2022 to end state taxes on retirement income, including income from ESOPs.

To become an ESOP, a trust purchases a company on behalf of that company’s employees, typically using a loan. The company sponsoring the ESOP, not the employees, pays back the loan. The employees then own a portion of the company and receive shares on top of their regular wages.

Ownership is granted based on the time employees put in rather than through purchasing shares. It rewards those loyal to the business.

It also creates a succession plan that benefits the employer and employees. Company owners can sell the company to their employees when they retire. This creates a level of job security for those who will continue working.

“Employee ownership generally comes on top of good wages,” Blasi said. “There’s a lot of evidence that the quality of jobs in ESOP companies is better. We know that these companies tend to pay well. They tend to offer additional diversified 401K plans with high company contributions.”

It is common to see companies advertise themselves as employee owned. They do this when advertising their goods and services as well as when seeking new hires. There are several reasons why an ESOP company may be attractive to job seekers.

“Some of the largest ESOP companies nationwide are grocery chains,” said Adria Scharf, associate director of the Institute for the Study of Employee Ownership and Profit Sharing at Rutgers University. “For a frontline worker working the cash register, or doing inventory control, or performing any other job, it means you get an ESOP account and accumulate shares of company stock in the account over time."

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After meeting those criteria, in many cases between one and three years on the job, employees enter a vesting period. This is when they gain access to a share of ownership.

Most ESOP employees, about 71-percent of them, also receive profit sharing. This compares to about 31-percent of non-ESOP employees.

“When you work hard and the company does well, you’re going to get a piece of the pie too,” Scharf said. “If the share price rises you are all going to be rewarded too.”

An ESOP is best suited for larger companies with at least 20-30 employees. More than 2,300 ESOP companies have less than 50 participating employees. About 1,300 have 50-99. There are 270 that have 1,000 or more.

Publicly traded companies and closely-held firms have adopted this form of employee ownership, Blasi said. They are also found across many industries.

The manufacturing industry has more than 1,100 ESOP companies, with plan assets valued at more than $161 billion. There are more than 300 in retail and 950 in construction.

Smaller companies in the United States often organize into a cooperative, or co-op. However, it’s possible for co-ops to exceed 50 participating employees and have net profits that rival smaller ESOP companies, according to Steve Storkan, executive director of the Employee Ownership Expansion Network.

“The biggest attribute of a co-op is that every worker owns one share of the company,” Storkan explains. “Every worker who wants to be a worker/owner — and you don’t have to be a worker/owner to work for a co-op — but every worker has that opportunity.”

That equal share in a co-op gives members a greater voice in company decisions. For instance, they are granted a vote for who should represent them on the board of directors.

“If we have a 15-person bakery and 11 of us are worker/owners, it’s not uncommon for 11 of us to do a lot of the decision making as a group,” Storkan said. “That’s why it works better for smaller companies.”

The members may also make decisions on how profits are used each year.

Storkan said ESOPs have been learning a few things from co-ops. Most notably, they are more often amplifying the voices of their employees in the decision-making process.

Employee Ownership Trusts are a popular form of employee ownership in the United Kingdom and have gained footing in Canada. Unlike an ESOP, an EOT shares profits among its employees.

The EOT does share a key similarity to an ESOP in that it creates a plan for succession. It is also subject to significant tax benefits.

“It’s a flexible model that meets the requirements of many business owners who want a succession solution that does not involve them selling out to a lifelong competitor and seeing a business close down,” said Graeme Nuttall, former independent advisor on employee ownership to the U.K. government. “We are trusting the trustees to step into our shoes and make sure it continues to be a successful business.”

Like employee ownership in the United States, it has shown to be a boon for the U.K. economy and workers across many industries.

Campbell McDonald, CEO of Ownership at Work, a U.K. think-tank focused on employee ownership, said these models do not inherently yield positive results. Well-run companies with strong cultures are what make employee ownership work for the workers.

“It is really about whether you are unlocking something in the mindset of the individual worker that stacks up to a change in how the business works,” McDonald said. “When people feel the stake they hold is meaningful and brings a benefit, it’s a game changer.”