EO Data & Analysis

There’s More Than One Way To Be Employee-Owned

March 1, 2024

Roughly 6,400 companies in America are employee-owned. They range from five employees to over 250,000, are headquartered in all 50 states, and operate at scale in every industry. One reason employee ownership has been so successful is flexibility. No matter the company size, sector, or lifecycle stage, there is an employee ownership structure that will work. At Certified Employee-Owned, we champion all types of employee ownership. Our simple and clear definition of “employee-owned” sets a standard that can easily be applied to any business. As interest in employee ownership grows, we thought it would be helpful to outline the major ownership structures including: Employee Stock Ownership Plans (ESOPs) Worker Cooperatives Direct Share Ownership Employee Ownership Trusts (EOTs) Equity Compensation Plans Employee Stock Ownership Plans (ESOPs) Most employee-owned companies in the US have an Employee Stock Ownership Plan, commonly referred to as an ESOP. An ESOP is a retirement benefit plan that’s open to all employees and invests primarily in the employer’s stock. ESOPs operate like 401(k)s, holding stock in s special trust that an employee-owner can access when they retire. Technically any business can have an ESOP but, due to the cost and administrative overheard, a company usually needs at least 30 employees for the plan to work. ESOPs can own any portion of a business and we’ve seen this percentage vary from 1% to 100%. Many large public companies have ESOPs that own a tiny fraction of outstanding shares, which is why it’s important to keep in mind that not all ESOPs are employee-owned. ESOPs are popular because they have many benefits. They have substantial tax advantages. For example, a 100% ESOP-owned S-corporation is exempt from federal income tax. By law ESOPs are broad-based, which makes them inclusive. Employees do not need to make a financial contribution to receive their shares, participation is automatic, and all employees who work at least half-time and meet a certain age threshold are eligible for ownership. Companies usually adopt an ESOP as a means of providing liquidity to selling owners. Based on an informal survey of our Members, we estimate that over 95% of ESOPs are created through conversion. As of the date of this article there are 5,734 employee-owned companies with an ESOP. Notable examples include Wawa, WinCo Foods, and Davey Tree. Worker Cooperatives Worker cooperatives are democratically owned and governed by their employee-owners. Worker participation in governance is the hallmark of a worker cooperative and usually includes employees voting on the board of directors on a one-person, one-vote basis. Worker cooperatives have a long history in the United States. There have been several waves of growth, including a large wave spanning the the 1970s and 1980s. Worker Cooperatives are currently in the midst of another wave spurred on by several development organizations including the US Federation of Worker Cooperatives (USFWC) and the Democracy at Work Institute (DAWI). Unlike ESOPs, a substantial number of Worker Cooperatives are employee-owned from the very beginning. A 2021 survey run by DAWI found that 88% of worker cooperatives are the result of startups, and just 12% are the result of business transitions. Additionally, worker cooperatives are almost all 100% owned by employees, though occasionally a company transitioning to a cooperative might have a period of joint ownership with the departing owner. Typically, worker cooperatives have eligibility requirements for becoming a worker-owner. This generally comes in the form of a waiting period of one to several years and a buy-in that ranges from a few hundred dollars up to a thousand. Not all coops have a buy-in, and those that do often offer worker-owners with favorable financing to encourage participation. As of the date of this article, there are 400 worker cooperatives. Notable examples include Cooperative Home Care Associates, Evergreen Cooperatives, and A Slice of New York. Employee Ownership Trusts (EOTs) Employee Ownership Trusts (EOTs), sometimes referred to as Employee Ownership Purpose Trusts, are quickly gaining traction as an innovative employee ownership structure. Modeled off an approach pioneered in the UK by companies like John Lewis Partnership, EOTs have been growing in the US since 2016 thanks to the work of groups like EOT Law, Common Trust, and Purpose Owned. EOTs are extremely flexible which allows selling owners to craft an employee ownership structure that closely aligns with their vision for the future. They are generally much less expensive than alternatives, especially ESOPs. And they can be set up to exist in perpetuity, which gives selling owners to confidence that their legacy of employee ownership will continue as long as their company continue to operate. EOTs are still in the early stages in the US and unfortunately don’t yet benefit from tax incentives. Despite that headwind, today there are roughly two dozen EOTs in the US and that number grows every year. Prominent examples of EOTs include Arbor Assays, Bicycle Technologies International, Text-Em-All. Direct Share Ownership Direct share ownership is another flexible option for employee ownership. While larger companies are likely to choose an ESOP for tax reasons, smaller companies sometimes find distributing shares directly to employees as a better method for implementing employee ownership. Direct share ownership has become increasingly popular thanks to Teamshares. Founded in 2019, Teamshares buys smaller companies and then sells the business back to employees over a 10- to 20-year time period. At this point we’re aware of 50 companies that use direct share ownership to achieve at least 30% employee ownership, and that number is growing rapidly. Equity compensation Equity compensation incorporates stock-based employee benefits including stock options, restricted stock, RSUs, stock appreciation rights, and phantom stock. Equity compensation is typically given to the employee at no cost. Equity compensation plans are popular ways to compensate executives and offer equity to employees at early stage startups because they are flexible and generally offer employees favorable tax treatment compared to giving them shares directly. Not many companies are using equity compensation to achieve 30% employee ownership, but there are a few and these structures offer a compelling option for newer companies that are growing and want a cheap, flexible way to bring early employees along as owners. All of the structures in this article have unique strengths and weaknesses. But they work towards the same goal: changing the relationship between company and employee by giving everyone a chance to earn an ownership stake. No matter the size, sector, or lifecycle stage, there is an employee ownership structure that can help any company build a team of owners.

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6,237 ESOP Companies in America: A Deep Dive on the Department of Labor (DOL) 5500s

June 12, 2023

The Department of Labor Form 5500s are the most commonly cited source of information on Employee Stock Ownership Plans. If you are part of the employee ownership community, have been to a conference, or even just read an overview of the employee ownership space, you have likely seen statistics derived from the 5500s. For example, there are around 6,237 Employee Stock Ownership Plan (ESOP) companies in the US with roughly 14 million participants. The 5500s are certainly an important source of information for the employee ownership community. But they also have a fundamental limit: not all ESOPs are employee-owned, and many employee-owned companies don’t have an ESOP. As every business person knows, if you want to grow, you have to measure what matters. Getting an accurate count of the number of employee-owned companies in America requires a simple standard that applies across all ownership structures. Our certification provides just such a standard. Despite their shortcomings, the 5500s remain a vital source of information on employee ownership. This article will give you a crash course including: What exactly are the Department of Labor (DOL) 5500s? 6,237 companies with an ESOP The 10 largest ESOPs in 2020 Certification measures what matters Appendix: how to download the ESOP dataset What Exactly Are the Department of Labor (DOL) 5500s? The Department of Labor oversees employee benefit plans created by the Employee Retirement Income Security Act of 1974 (ERISA), including Simplified Employee Pension Plans (SEPs), Profit Sharing Plans, 401(k)s, and ESOPs. Any company maintaining one or more of these plans is required to report key plan information to the DOL on an annual basis via the Form 5500. The DOL maintains a public archive of fillings going back to 1999, and anyone can access the data directly. For advocates of employee ownership, the data have a few challenges. Companies can apply for extensions and submit updated fillings, which creats duplicates. As with all self-reported information, some variables are extremely noisy. Collection takes quite a bit of time, so complete DOL fillings come out on an approximate two-year lage. Finally, companies with an ESOP are not required to report the total percent of the company owned by their employees, so there’s no way to tell how much of the company is owned by the ESOP. 6,237 Companies With an ESOP As of June 2023, the most recently available and complete DOL filling is the 2020 vintage (see Appendix for more detail). If you download the files from the DOL website, you will be struck by the size. You can open the CSV in excel but your computer might need some time to think because the file contains over 248,000 rows. Did the number of ESOPs increase dramatically? Unfortunately not. The file is much larger than the number of ESOPs because, as mentioned above, all employee benefit plans are required to submit an annual Form 5500. Selecting all fillings with an ESOP yields 6,603 rows. Added together, these fillings report 14,150,373 total participants and 10,304,341 active participants. But some companies have submitted multiple fillings. Others indicate a plan year that is well before 2020, in one case as early 2000. Ignoring these and counting only unique EINs we find 6,237 companies reporting 13,321,687 total participants and 9,755,354 active participants. The 10 Largest ESOPs in 2020 Sorting this list by number of active participants we can get a sense for the 10 largest companies with an ESOP: Company Active Participants WALMART INC. 1,689,489 THE HOME DEPOT, INC. 424,733 CVS HEALTH CORPORATION 237,061 LOWES COMPANIES, INC. 305,280 TARGET CORPORATION 356,847 WELLS FARGO & COMPANY 340,353 BANK OF AMERICA CORPORATION 283,172 COSTCO WHOLESALE CORPORATION 184,379 JPMORGAN CHASE BANK, NATIONAL ASSOCIATION 271,120 AT&T INC. 281,286 Total 4,373,720 To members of the employee ownership community, this list is probably surprising. These aren’t the companies that come to mind when we think of large, employee-owned businesses. It helps to remember that companies with a wide variety of employee benefits plans are required to file a Form 5500. These companies are likely checking the ESOP box because they have an Employee Stock Ownership Plan that owns a small portion of the company, in addition to the many other employee benefit plans they offer (Walmart, for example, indicates 8 plan types). It might even be a legacy plan that is inactive. Due to the aggregate nature of the 5500s, it’s difficult to tell. Certification Measures What Matters The data quality issues highlighted above might cause some doubts about the reliability of the DOL 5500s. But the list of the 10 largest ESOPs points to a more fundamental issue: there’s a difference between ESOP and employee-owned. While they are a useful source of information, ultimately the DOL 5500s cannot tell us the number of employee-owned companies. Accurately measuring the size of employee ownership requires a definition of “employee-owned” that can be applied to any company. Certification provides many benefits, including a consistent standard that enables an accurate count of employee-owned companies. And as every business person knows, you have to measure what matters in order to create growth. At Certified EO, we have spent the past five years creating the infrastructure required to accurately count the number of employee-owned companies in real time. We have consolidated the publicly available sources of data of employee ownership, resolved the data issues, verified key variables by hand, and supplemented the raw data with critical information like the percent of the company owned by employees. The result of thousands of hours of work is our Directory of Employee-Owned Companies. The Directory provides an up-to-date number of employee-owned companies that changes as soon as we learn new information. It also transparently lists every employee-owned company and facilitates exploration through search and filters. The good news is that there are more employee-owned companies than companies with ESOPs! As of June 9th, 2023, our Directory lists 6,390 employee-owned companies, more than the number of companies with ESOPs listed in the 2020 DOL fillings. Using data collected during our certification process we estimate that employee-owned companies employ between 2 million to 3 million Americans. These numbers represent a more accurate measure of employee-owned companies and are a starting point for growth for our community. Appendix: Step-By-Step Instructions for Downloading the ESOP Dataset Go to the Form 5500 Datasets page on the Department of Labor website. Choose which year of data to download. In my experience, data sets are completed in the Fall on a 2-year lag According to the DOL, Go to the Form 5500 Datasets page on the Department of Labor website. Choose which year of data to download. In my experience, data sets are completed in the Fall on a 2-year lag According to the DOL, companies are required to file on “the last day of the seventh month after the plan year ends (July 31 for a calendar year plan),” but it seems like it takes a while for submissions to end up in the public data. For example, on June 12th, 2023 I downloaded the 2021 fillings and found roughly 6,100 entires for ESOPs. Either the number of ESOPs dropped dramatically from 2020 to 2021 or, more likely, the dataset is still being completed. Based on past years, I would expect that to happen in October of 2023 for the 2021 fillings. Open the data and filter for ESOPs using the TYPE_PENSION_BNFT_CODE variable Values of 2O, 2P, and 2Q correspond to non-leveraged ESOP, leveraged ESOP, and S corporation ESOP, respectively. Notice that companies will often have more than one plan type, it might be helpful to create a formula that returns true if the TYPE_PENSION_BNFT_CODE variable contains one of the ESOP indicators. After filtering you should see around 6,600 rows of data for the 2020 fillings, but be mindful of duplicates and late fillings. Sort by size (TOT_PARTCP_BOY_CNT) to begin your exploration.

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Which States & Industries Are Best For Employee Ownership?

May 3, 2023

Everyone involved in employee ownership has a responsibility to strengthen our community. Advocates, service providers, trade organizations, businesses, and employee-owners all benefit when our ranks increase. But to grow successfully, we must understand where employee ownership thrives.In this article, we combine our certification data with data from the US Census Bureau to analyze where there are a surprisingly large number of employee-owned companies. Looking at company size, industry, and headquarters location, we find insights that will help our community grow:Manufacturing, Professional Services, and Construction are the top industries for EO. Combined they have almost 600,000 non-EO firms, which means focusing on these sectors seems like the biggest growth opportunity for employee ownership. 100 - 500 employees looks like a sweet spot for employee ownership. It also represents a large growth opportunity with roughly 93,000 non-EO firms and over 18 million employees.10 - 20 employees has far fewer employee-owned firms than baseline, likely due to limits of current structures. With over 640,000 non-EO firms it represents a big opportunity to grow firm numbers (less so employee numbers), but this requires new EO structures such as Direct Share Ownership.Vermont, North Dakota, Maine, Iowa, Hawaii are the top states for EO by concentration. Together these states have around 67,000 non-EO firms with more than five employees, which makes it a smaller opportunity in terms of raw numbers. But efforts in these states will benefit from dense networks of peer firms that can advocate for employee ownership.California, Pennsylvania, and Ohio are the largest states (by number of firms) with an above-baseline level of employee-owned companies. This represents an alternative geographical approach that might yield more potential conversions because combined these three states have over non-EO 480,000 businesses.Details on our methodology and additional findings are below.‍Data on Employee-Owned and US CompaniesTo understand where employee ownership thrives, we must have a detailed understanding of both the number of employee-owned companies and the number of all US businesses. Looking at only the raw number of employee-owned companies can be misleading because it ignores baseline concentration. For example, if 5% of employee-owned companies were in a particular state, we would interpret that differently if 10% or 1% of all businesses were in that state.Data on employee-owned companies comes from our Directory of Employee-Owned Companies, an up-to-date list of all businesses that meet our standards of significant, broad-based employee ownership. We pulled the numbers on March 1, 2023 and in some cases we supplemented our information with 3rd party sources. Data on all US businesses come from the Census Bureau’s Statistics of US Businesses (SUSB). At the time of our analysis the most recently available series was the 2019 data set. ‍Employee-Owned Companies By Ownership StructureThere are a number of different ways a company can be employee-owned. The following table breaks down the number of employee-owned companies by ownership structure:By far, the most common structure is the Employee Stock Ownership Plan (ESOP), accounting for roughly 90% of employee-owned companies. Worker cooperatives are the second most common structure, followed by a few emerging structures that are small but have the potential for rapid growth. Direct Share Ownership in particular is showing promise as the best structure for companies with fewer than 30 people, including newly formed businesses. Due to the emerging nature of these structures, our numbers are best thought of as lower bounds. All told there are at least 6,416 employee-owned companies in America. ‍Employee-Owned Companies By SizeUsing information collected during our certification process to project the number of employees at every employee-owned company, we can analyze the size distribution:It’s important to note that the distributions are censored to exclude firms with fewer than 10 employees. The purpose is to focus on companies that have a substantial number of non-founder employees, which is the relevant comparison group for employee ownership. The chart clearly shows that employee-owned companies skew larger than baseline. There are fewer in the 10 - 20 size bucket, with 48.9% of all firms in this range but just 12.7% of employee-owned companies. The two distributions are in the same ballpark for 20 - 100 employees. But all buckets greater than 100 employees have far more employee-owned companies than baseline. Roughly a third (32%) of employee-owned companies are in the 100 - 500 range, 4.4x the baseline of 7.2%. We see a similar trend in the 500 - 1,000, 1,000 - 2,500 and 2,500+ categories. The simplest explanation for the skewed distribution comes from the well-known fact that ESOPs generally don’t work for small companies. The cutoff varies depending on who you ask, but is broadly stated to be between 20 and 40 people. Given that 90% of employee-owned companies have an ESOP, that would explain the skew. There are two implications for growing employee ownership. First, if you’re doing ESOPs, focus on firms with at least 100 people. The large difference in concentrations leads us to think that the 100 - 500 size range in particularly good. According to the SUSB this range has 94,957 total firms with 18,612,620 employees, which makes it a sizeable growth opportunity.Second, there is probably a huge opportunity to create and promote structures that work for firms too small for an ESOP. The 10 - 20 size range has 640,827 firms in the 2019 SUSB, but we estimate just 712 employee-owned companies. In my opinion, Direct Share Ownership models using stock options are the most promising opportunity here.‍Employee-Owned Companies By Industry‍Next we can use the North American Industry Classification Systems (NAICS) to look at the distribution of employee-owned companies by industry:‍Three data notes. First, while NAICS is included in the DOL 5500 data for ESOPs, it is extremely messy. We have gone through and recategorized the industry information for all 6,300+ companies in our database. Second, we exclude the “Finance and Insurance” category for this analysis because there are a large number of community banks with a small ESOP (below our 30% threshold) that we are still cleaning. Finally, again we exclude small firms, this time those with fewer than five employees.Three sectors, Manufacturing, Professional Services, and Construction, account for nearly half of all employee-owned companies (48.7% combined). All three sectors far exceed the baseline distribution, but Manufacturing in particular stands out with 2.7x the expected concentration. These industries likely represent a substantial growth opportunity for our community. In the 2019 SUSB there are 144,201 Manufacturing firms, 213,955 Professional Service firms, and 242,885 Construction firms. Converting and additional 1% of each of these industries would roughly double the number of employee-owned companies. The importance of the baseline analysis are clear when looking at Retail Trade. On an absolute basis this is the 5th largest sector for employee-owned companies. But the concentration is 48% lower than baseline. There are three sectors that jump out as particularly challenging for employee ownership. Health Care, Accommodation & Food Services, and Other Services (details on this category can be found here). While there are employee-owned companies in each of these sectors, they all lag the baseline substantially. These industries account for 39.6% of all businesses but just 3.4% of all employee-owned companies. There are two ways to interpret this lag. There might be something about these sectors that makes it difficult to be employee-owned, or these might be industries where there are missed opportunities. A good starting point might be to connect with the employee-owned companies who do operate in this sector to get their thoughts on what is driving this trend. ‍Employee-Owned Companies By StateWe can use the headquarters location of each firm to look at concentration by State. Again we focus on firms with at least 5 employees:‍California, New York, and Texas are the top three states for total number of employee-owned companies with 13.4%, 5.5%, and 5.2% respectively. But again the baseline analysis provides a more nuanced picture. Both New York and Texas have a lower share of employee-owned companies than expected given their share of all businesses. The implication is that these states might not actually be as opportune for employee ownership as the raw numbers imply.In terms of concentration relative to baseline, the top states for employee ownership are: Vermont (3.0x baseline)North Dakota (2.5x baseline)Maine (2.3x baseline)Iowa (2.2x baseline)Hawaii (2.0x baseline)Together these states account for 6% of all employee-owned companies but just 2.7% of all companies. Together they represent 67,348 total firms with more than five employees, many of which will have peers or neighbors that are employee-owned. Another approach to geography is to look at the largest states with an above-baseline level of employee-owned companies. This would suggest California (1.1x baseline), Pennsylvania (1.1x baseline), and Ohio (1.4x baseline) are the places to focus. This approach might yield more conversions because these three states have over 480,000 businesses with at least 5 employees.The states with the lowest number of employee-owned firms relative to baseline are Delaware (18%), Rhode Island (44%), Nevada (45%), New Jersey (45%), and Florida (48%). Again the interpretation here is a complex. Perhaps there is something about these states that discourages employee ownership, or perhaps these states simply represent opportunities to bring employee ownership up to par. The only way to know for sure is by contacting some of the 267,410 businesses in these states to see how many are interested in exploring employee ownership.

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We Must Build an Employee-Owned Economy

December 6, 2022

When it comes to work, America is at a crossroads. Good jobs are getting harder to find as roles are increasingly contracted, gigged, and automated. Companies are being gobbled up through consolidation or closing down as the baby boom generation retires. On their own these trends have made work more precarious for millions. Together they are undermining the foundational premise of America as a land of opportunity. While momentum leads to a future of work that is ever more precarious, it is not too late to change course. We can create shared prosperity by building an employee-owned economy. Today’s challenges are decades in the making. The period just after World War 2 marks a high-point for job security. Large firms like General Motors and IBM sought dedicated employees and offered them stable careers. When companies did well, people did well. But globalization, offshoring, and technological change have broken that connection. Productivity and wage growth moved in lockstep from 1948 to 1978, but since then they have decoupled with productivity growing four times faster than average compensation. Companies are getting more valuable, but fewer of those gains are being passed on to workers. The rise of the gig economy on the heels of the financial crisis has accelerated this trend. If you work for Uber you might be a programmer with generous compensation that includes stock options, but more likely you are a driver, ping-ponging around town for the lowest price the algorithm thinks you’ll take while covering expenses out of your own pocket. The gig economy has exploded since 2009 with 23M Amricans (9% of adults) working a gig job in 2021. As more jobs are demoted to gigs, millions of Americans will find the skills they have spent years honing are no longer enough to make ends meet. What will these people fall back on? For many there is no safety net at all. According to the Federal Reserve’s Survey of Consumer Finances, in 2019 13 million households had negative net worth. And for others, a small net might be there but they can’t afford the fall. Just 4 in 10 Americans have sufficient savings to cover an unforeseen expense of $1,000. Looking at fifty years of increasingly precarious work combined with a snapshot of Americans’ finances, one thing is clear: millions could soon find themselves with no financial or human capital. This is a major concern for every single American. Since our country’s founding, leading thinkers have recognized that a healthy republic is rooted in the broad-based ownership of property. Founding Fathers such as Thomas Jefferson saw the small landowner as the bedrock of our democracy because owning land made them independent and active citizens. This was also the guiding principle behind the Homestead Act of 1862, which created 4 million family farms. These ideas and policies focused on land because in the agricultural economy of the 1700s and 1800s, farmland was the most important asset. Today, the most important asset is business ownership. Owning a business is how great fortunes are built, just look at Elon Musk or Bill Gates. According to the 2019 Survey of Consumer Finances, business ownership is the largest asset class, with public and private companies accounting for over $32T of wealth, much more than home equity ($19T). And it’s not just the household names who own stock. Among the Top 1%, the largest asset is ownership of private businesses, accounting for 38% of their portfolio with average value of $10.8 million, and the second largest asset is public company stock, accounting for 18% of their portfolio with average value of $5.1 million. Yet, the bottom 50% of households by wealth hold a combined 0.25% of all business ownership, just $1,347 per household. Securing the future of our democracy means expanding the opportunity of business ownership. Thankfully we have a solution that has been tested and proven for 50 years: broad-based employee ownership. The idea that employees should hold some stock in their employer has a long history, but it got meaningful traction with the creation of the Employee Stock Ownership Plan (ESOP) in 1974. Today, there are over 5,600 employee-owned companies operating in every industry and state. They range in size from 5 people to over 220,000 and employ over 2.5 million people. Employee-owned companies like Publix Supermarkets, Wawa, and Bob’s Red Mill represent the blueprint for modernizing the American dream. Employee ownership changes the relationship between the company and employee by ensuring that everyone who works at a company has reasonable access to the benefits of ownership. Making employees into employee-owners helps them build wealth. A 2021 study by the National Center for Employee Ownership found the average employee-owner had roughly $67,000 more in retirement wealth, compared to workers at non-employee-owned firms. And this can scale. Our research calculates that if every American company became employee-owned the net worth of the bottom 50% by roughly $81,000 on average. Employee ownership also benefits workers the first day they walk in the door by creating a better working environment. Broad-based ownership aligns everyone around a unified goal and creates a shared purpose. Alignment increases commitment, trust, and accountability. This leads to stronger relationships, closer connections with coworkers, and increased job stability. Finally, employee ownership makes companies stronger. Decades of research show that broad-based ownership combined with high-involvement management systems increases key performance indicators like productivity, revenue growth, and employee engagement. Even large private equity firms are beginning to see employee ownership as a way to supercharge engagement and increase business performance. Taken together, the evidence on wealth building, culture, and company performance show employee ownership is a win-win-win: it’s good for workers, good for business and good for our country. Transitioning to an employee-owned economy would create shared prosperity that benefits all Americans, but we must act now. A start would be converting a portion of the 2.3 million companies owned by Baby Boomers, the youngest of whom will hit 65 in 2029. But we must think bigger than just business conversion. An employee-owned economy represents an entirely new way to view work and a new relationship between the company and employee. We must make it easy for people who understand this difference to find employee-owned companies. We must coordinate and amplify the voice of our movement to share the advantages of employee ownership far and wide. And we must set a standard that people know and trust to defend against the inevitable pretenders. The need for broad-based business ownership has never been greater. The time has come to build an employee-owned economy.

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How Many Businesses Are There in America and What Does it Mean for Employee Ownership?

July 14, 2022

Building an employee-owned economy can create a more prosperous future. Employee-owners benefit from higher retirement savings and increased job security, while employee-owned companies anchor jobs in local communities. That future begins by increasing the number of employee-owners. Some companies start out as employee-owned, but the vast majority convert after operating for some time under a different ownership structure. Since launching Certified Employee-Owned in 2017, we have spoken to over 1,000 employee-owned companies. Fewer than 10 began as employee-owned. It’s difficult to generalize, but based on our experience we think that over 95% of employee-owned companies were created through conversion. The importance of conversion means that advocates of employee ownership need a good understanding of the broader business landscape. The best source on the size and number of American businesses is the Census Bureau’s Statistics of U.S. Businesses (SUSB). In this article we will use the SUSB to analyze the business landscape and draw implications for the employee ownership community. Our key takeaways include: The number of companies large enough for employee ownership has been steadily rising since 2011 and now stands at just over 1.3 million. Most Americans work at large companies, but most US businesses are small. To drive a dramatic increase in the number of employee-owners, the employee ownership community needs a strategy for converting businesses with over 500 employees. Three sectors represent major opportunities for growing employee ownership: Health Care & Social Assistance; Accommodation & Food Service; Professional, and Scientific & Technical Services. Total Number of American Businesses According to the U.S. Small Business Administration, there are 33.2 million American businesses in 2023, but there’s a catch. That number is skewed because it counts every single corporation, including those setup by independent contractors and even shell companies created solely to hold an asset. There’s no bright line between a legal corporation and what a normal person would consider a business, but a reasonable breakpoint might be having at least one paid employee. That is the line used by the SUSB, and in 2019 there were 6,102,412 businesses meeting this criterion. The concept of employee ownership only starts to have real meaning when a company includes multiple non-founder employees. While there are exceptions, most companies exploring employee ownership have at least 10 total employees. A company of this size will generally have the resources that enable conversion while also seeing benefits from a formal employee ownership structure. Using the SUSB’s size categories, we found that in 2019 there were 1,311,698 businesses with at least 10 employees. We estimate that there are roughly 6,000 employee-owned companies in America (our Directory provides an up-to-date list of all the ones we know about). That means that employee-owned companies are just 0.5% of the total number of companies with at least 10 employees. The chart above shows how the number of companies with at least 10 employees has changed since 1999. It dipped slightly at the turn of the millenium following the dotcom crash, increased steadily in the early 2000s before dipping again after 2006 and plunging after the 2008 financial crisis. After hitting a bottom of 1,173,373 in 2011, the number of companies with at least 10 employees has seen year-over-year increases every year through 2019. For the employee ownership community, it’s encouraging to see that the number of companies that are large enough to consider employee ownership has been steadily rising for almost a decade. Size Distribution Analyzing the SUSB size categories, we see that US businesses have a skewed distribution of size. While most firms are small, most people work at large employers. Roughly 30% of private-sector workers work at the 1,112 firms with over 10,000 employees, while the 4,790,714 businesses with fewer than 10 employees account for less than 10% of private sector employment. In other words, firms large enough to support an employee ownership program account for over 90% of the private-sector workforce. The skewed distribution of firm size presents a tradeoff for employee ownership advocates: do we focus on the number of companies that are employee-owned or the number of people working at employee-owned companies? If we are interested in maximizing the number of employee-owned firms, we’re going to have the most success focusing on small companies. But if we are interested in maximizing the total number of employee-owners, the emphasis should be on the big companies. This tradeoff is mirrored in the change in firms and employment from 1999 to 2019. The bulk of firm and employment growth was driven by large firms. Over this time period, the total number of firms with at least 10 employees increased 9% and employment at these companies increased 22%. Almost all of the increase in the number of firms was driven by companies with less than 500 employees, while 75% of the change in employment was driven by firms with 500 or more employees. The trend is clear: while there are more companies now than 20 years ago, the bulk of new private sector employment over the past two decades has been due to growth of larger firms. Industry Distribution Finally, we use the SUSB industry categroies to analyze changes in employment and total number of firms by industry. It’s worth noting that all categories here are based on the North American Industrial Classification System (NAICS) and that the SUSB excludes railroad employees, agricultural production employees, and most government employees. The following chart shows employment by Industry for 2019 for all firms with at least 10 employees. Below is a table with both employment and number of firms by industry. Note that the number of firms doesn’t align exactly with the previous section, likely because some firms operate in multiple industries. The four largest industries by employment - Healthcare & Social Assistance, Retail Trade, Accommodation & Food Services, and Admin, Support & Waste Management - are all part of the service sector. Manufacturing, once the backbone of the American economy, is now the fifth largest sector by employment. Construction and Professional, Scientific & Technical Services, and Other Services (excluding Public Admin) are notable for having a high number of firms of a smaller average size. Finally we look at how the number of firms and employment by industry have changed over the last two decades. This chart above shows the percent change from 1999 to 2019. Dramatic increases of over 50% employment occured in many service sectors including: Accommodation & Food Services; Educational Services; Health Care & Social Assistance; Arts, Entertainment & Recreation, Professional, and Scientific & Technical Services; and Admin, Support & Waste Management. Several industries show signs of consolidation with increasing employment and decreasing number of firms: Information; Finance & Insurance; Retail Trade; and Wholesale Trade. Finally, the dramatic decline in manufacturing can be seen in a 26% decrease in the number of firms and 28% decrease in total employment. Combining current firm size and employment with growth trends can help identify large and growing industries which would be good to target for the expansion of employee ownership. Based on the above charts, Health Care & Social Assistance; Accommodation & Food Service; and Professional, Scientific & Technical Services merit further investigation.

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New Partnership: Certified Employee-Owned & The Healthcare Anchor Network

May 24, 2022

Certified Employee-Owned and The Healthcare Anchor Network (HAN) are excited to announce a new partnership to help over 1,000 hospitals identify procurement opportunities with employee-owned companies! HAN is a nationally recognized collaboration of health systems leveraging their purchasing, hiring, and investing power to improve health and well-being by addressing economic and racial inequities in the communities they serve. HAN works to achieve a critical mass of health systems adopting the anchor mission, a proactive commitment to leverage their economic, political, and human capital to drive equitable, local economic impact. HAN was launched in May 2017 and today represents over 70 health systems with more than 1,000 hospitals, $75 billion of purchasing power, $150 billion of invested assets, and almost 2 million staff. HAN members include Boston Children’s Hospital, Cleveland Clinic, Kaiser Permanente, and University of California San Francisco. “We’re delighted to have the support of Certified Employee-Owned's knowledge of the field to help our members know the Certified Employee-Owned companies in their service areas and look for opportunities to do business with them,” stated David Zuckerman, President & Founder, Healthcare Anchor Network. Employee ownership is increasingly recognized as a way to reduce wealth inequality and strengthen local economies. By procuring products and services from employee-owned companies, anchor institutions will create good jobs while benefiting from increased service quality. To date, the main challenge preventing anchors from accessing this win-win opportunity has been the difficulty of finding employee-owned companies. As the only national certification focused on employee-owned companies, Certified Employee-Owned is perfectly positioned to help anchor institutions find employee-owned suppliers. Our standards of significant and broad-based employee ownership span all types of employee-owned companies including Employee Stock Ownership Plans (ESOPs), Worker Cooperatives, Employee Ownership Trusts (EOTs), Equity Compensation Plans, and more. Since our launch in September 2017, we have been working to build a list of verified employee-owned companies as well as tools to help people explore employee ownership, for example our Directory of Employee-Owned Companies. This partnership represents the first step to creating widespread purchasing preferences for employee-owned companies. The initial focus with HAN will be on helping their health systems identify current vendors who are employee-owned and educating HAN members on the benefits of doing business with employee-owned companies. Some health systems may be interested in taking the next step of integrating employee ownership into their process for identifying future vendors and filling open contracts. The experience and success stories from this partnership will help us build toward future purchasing engagements and could provide the proof-of-concept required for state or even federal purchasing preferences for employee-owned companies. To learn more about how we are working with HAN to promote purchasing from employee-owned companies, register for our upcoming webinar on July 21st.

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Capital Accounts and Profit Sharing: The Two Ways Employee-Owners Build Wealth

April 27, 2022

Employee-owned companies can build life-changing wealth for working people. Take WinCo Foods. After roughly 40 years as an ESOP, the 130 workers at a single store in Corvallis, Oregon had a combined $100M in ownership wealth and across the company, over 400 front-line employees were “millionaire grocery clerks.” Or consider Springfield Remanufacturing Company (SRC). From 1983 through 2017, the company paid nearly $100M in distributions to its employee-owners. CEO Jack Stack highlights one person who, “started here in 1983 making $7.50 an hour [and] has now got $1.2 million.”While not every employee-owner will become a millionaire, research shows that these remarkable examples highlight broader trends. A 2018 study of S Corporation ESOPs found that employee-owners have nearly double the average retirement wealth of non-employee-owners ($170,326 versus $80,339). In 2021 we used data from the Federal Reserve to show that if every American business became employee-owned, wealth inequality would be reduced to historic lows and the wealth of the median household would increase by over $100,000.How are employee-owned companies helping people build this much wealth? While there are many ways to create and run an employee-owned company, there are only two ways that these businesses put money in the pockets of their workers: capital accounts and profit sharing. ‍Capital AccountsCapital accounts are distinct accounts hold company stock directly or derivatives such as stock options on behalf of individual employees. Employee Stock Ownership Plans (ESOPs), Employee Stock Purchase Plans (ESPPs), and stock options are all forms of capital accounts. Capital accounts are typically funded through an initial grant or annual contributions. Funding might come from the company, as with an ESOP, or from the employee-owner, as with an ESPP. Today there are over 5,800 employee-owned companies using capital accounts. Capital accounts benefit from compound growth.The value of the stock or derivative in a capital account is tied to the performance of the company through the share price. Assuming the business is performing well, the company’s share price will increase and the value of the capital account will go up. Importantly, the increase in value from share price growth applies both to contributions as well as prior share price growth, which creates compound growth.Compound growth is how employee-owners can build life-changing wealth. Specifics vary, but many reasonable scenarios that reflect real-world practice lead to six-figure wealth building, and, as we saw with WinCo and SRC, companies that are employee-owned for 25+ years usually have front-line millionaires. While compound growth has tremendous potential, the key ingredient is time. Drawing the account down will erase the compounding. Building substantial wealth typically requires the capital account is untouched for 20 years or more. Eventually employee-owners must turn their capital account back into cash. Because employee-owned companies are private, there are generally two options: the company buys the share back or the accounts are cashed out when the company is sold. Due to the nature of business valuation, companies almost never have enough cash on hand to buy back all outstanding shares. This leads to a situation at mature capital account companies called “share recycling” where shares are bought from selling owners and recycled back to new owners. This is a time-tested practice that can continue for a long time if both the employee ownership plan and the company are managed well. ‍Profit SharingProfit sharing is when a company regularly distributes some portion of profits back to employees as cash. The key feature of profit sharing is liquidity. Profit sharing is typically done on a quarterly or annual basis, and once the profits are in and the benefit is calculated a check is cut to qualifying employee-owners within a few weeks.Profit sharing can be implemented in a variety of ways, but not all forms of profit sharing are ownership. For example, a plan that exists solely at the discretion of management can provide a nice benefit, but it is not ownership because it can be taken away by management without any sort of monetary compensation to the employees. To be considered ownership a profit sharing plan must have a legal claim on part or all of the business and it must have codified distribution rules that are broad-based. Profit-sharing benefit plans that own shares of company stock can meet these criteria, but in our experience these plans rarely own enough of the company for it to meet the definition of employee-owned. Currently we see just two types of employee-owned companies where the primary wealth building mechanism is profit sharing: Worker Cooperatives and Employee Ownership Trusts (EOTs). We know of roughly 400 companies operating through these two vehicles today.‍Tradeoffs Between Capital Accounts and Profit SharingThe structure of capital accounts and profit sharing leads to a fundamental tradeoff between wealth building and liquidity. ‍Wealth BuildingThrough compounding, capital accounts help employee-owners build more wealth than profit sharing. Specifics vary, but typically after 30 years compound growth is responsible for at least 80% of the value of a capital account (explore scenarios here). If the account owner had instead received their annual allocations of stock as cash payments, for example through profit sharing, they would have received just one fifth of the value of the capital account over time. I doubt that any employee-owner has ever built a million dollars in wealth through profit sharing alone.‍Liquidity (Timing of Payments)While capital accounts have greater wealth-building potential, profit sharing provides money sooner, and money today is more useful than money later. Most capital account structures at employee-owned companies own illiquid private-company stock, so employee-owners have limited withdrawal options. On top of that, regularly withdrawing a portion of your capital account will diminish or even completely offset the benefits of compounding. Delayed gratification is inherent in the concept of capital accounts just as liquidity is inherent in the concept of profit sharing. The ultimate point of employee ownership is to create better lives for working people and if people have immediate needs, waiting might not be an option. While profit sharing builds less total wealth, it provides greater liquidity and that tradeoff might be worth it for some people, especially those making a lower income. ‍Investing in GrowthThe differences between profit sharing and capital accounts have implications for how a company invests in growth. Capital accounts are fundamentally long-term and therefore can be much better for alignment. Theoretically, profit sharing can disincentivize investing in the business, since investments reduce profit now in exchange for profit later. For example, buying an expensive piece of equipment that would increase profitability multiple years in the future. If employee-owners have a strong need for money now, will they still make that investment?‍Why Not Both?Considering the advantages of both capital accounts and profit sharing it’s tempting to ask: why not do both? In theory you could split the ownership of a company in any way between capital accounts and profit sharing. In practice, we find that companies tend to do one or the other. We haven’t counted exactly, but I would estimate that over 95% of employee-owned companies either have capital accounts or they are owned 100% by an EOT or Worker Cooperative.There is a major exception: discretionary profit sharing. While not actually ownership, profit sharing that exists at the discretion of management shares the positive characteristics described above, specifically the immediacy of payment and the attendant culture-building benefits. For this reason, we see many companies with capital accounts implement a discretionary profit sharing plan as well. Typically it has a quarterly or annual cadence and the primary focus is to strengthen the connection between the success of the company and the success of the employee-owner. Wealth building for working people is the common thread running through all corners of the employee ownership community. Different companies in different industries employing different people will all find their own balance in the tradeoff between capital accounts and profit sharing. What’s important is to consider what’s right for your company and your people.‍‍This article was originally posted 4/27/22 and was updated on 5/9/2023. Special thanks to Jon Shell of Social Capital Partners who read an early version of this post and suggested the point about “Investing in Growth”. That section is adapted from his email. ‍-----------------After publication, Christopher Mackin of Ownership Associates sent a thoughtful reply detailing a notable example of a non-US company that uses both profit sharing and capital accounts, as well as a template for implementing a dual structure. With permission, I am including the content of the message here for interested readers."Your statement that worker cooperatives and EOT's are where profit sharing employee ownership models reside is a bit problematic. You are factually correct about EOT's and most American worker cooperatives. But it is also the case that perhaps the most prominent single example of what you are calling Capital Accounts is in the Mondragon worker cooperative system of - yes - internal capital accounts. David Ellerman and the rest of us at the Industrial Cooperative Association worked hard in the 1970's and 1980's to develop model by laws for worker cooperatives (pps.16-20) that specify how to establish that internal capital account model which David thought through independently of Mondragon. When we traveled there in the late 1970's we were amazed to find a real world example of scale that made use of the very same ideas - a membership share of stock the price of which was set and adjusted only for inflation separated from individual internal capital accounts into which annual profits were contributed and losses deducted. These same accounts obviously also compound wealth.It is my guess that only a small percentage (say 10%?) of American worker cooperatives make use of the internal capital account system used in Mondragon. That is or will become a problem for them when the pressure to pay out cash is perceived to be a zero-sum decision on the part of members (cash for persons or undifferentiated investment in the cooperative). The internal capital account system breaks through that problem and does so in a way that is actually superior in my mind to the ESOP structure which has the benefit of capital accounts but the pressure to value those accounts using net present value methodologies."

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The Difference Between “ESOP” and “Employee-Owned”

February 16, 2022

If you’ve spent time learning about employee ownership, then you’ve certainly heard of Employee Stock Ownership Plans, or ESOPs. In fact, ESOPs are so common among employee-owned companies that many people use these terms interchangeably. You might be surprised to learn that, while ESOPs are certainly the most common type of employee-owned company, there is actually quite a bit of daylight between the two concepts. Not all ESOPs are employee-owned, and not all employee-owned companies have an ESOP. This article walks through the differences between “ESOP” and “employee-owned” including: Quick Background on ESOPs Not all ESOPs are Employee-Owned Many Employee-Owned Companies Don’t Have an ESOP Defining “Employee-Owned” Stronger Together Through Certification Quick Background on ESOPs ESOPs have grown dramatically since their creation in 1974 as part of the Employee Retirement Income Security Act (ERISA). According to the Department of Labor, there are currently around 6,300 companies with an ESOP. They range in size from dozens of employees to hundreds of thousands and operate in every industry imaginable. The ESOP’s popularity is due to a number of factors, including nearly 50 years of proven success, strong tax benefits, and a fantastic community of advocates and service providers. By law, ESOPs are extremely inclusive. The basic idea behind an ESOP is that it is a trust that owns company stock on behalf of a broad-based group of employees. Shares are usually allocated to eligible employees annually, and the eligibility criteria employees must meet to receive a share allocation are very open. Typically employees need to work 1,000 hours in a year to participate, an average of only 20 hours per week. Additionally, ESOP shares are paid out of company profits and are allocated to employees at no cost. These open criteria drive high participation and ensure that workers at ESOP companies benefit when their employer is successful. Not all ESOPs are Employee-Owned While all ESOPs are broad-based, the percentage of total outstanding stock owned by the ESOP varies dramatically from company to company. There is no minimum, and in practice we’ve seen this range anywhere from a fraction of a percent to 100%. Of course, an ESOP that owns even just a tiny piece of a large and successful company can provide a great benefit to employees, especially since employees are not paying for the shares out of their wages. But there is a categorical distinction between a company operating a small broad-based, share-ownership plan as a benefit and a company where the employees own a substantial portion of the stock, perhaps even 100%. In other words, there is a difference between having an ESOP and being employee-owned. Further clarity can be gained by looking at a specific example. In the publicly available Form 5500 data, the largest company indicating they have an ESOP is Walmart. To be sure, that ESOP must be a nice benefit for some of the company's employees. However, it probably is not having the same impact as the ESOP at 100% employee-owned WinCo Foods, which has made many front line employees into millionaires. WinCo is just one of many inspiring stories of employee-owners building life-changing wealth. That’s why it’s important to remember that having an ESOPs doesn't always mean a company is employee-owned. Many Employee-Owned Companies Don’t Have an ESOP While the ESOP model is the most popular and successful structure used by employee-owned companies, it is not the only option. There are a number of alternative ways to implement significant and broad-based employee ownership, including Worker Cooperatives, Employee Ownership Trusts (EOTs), Employee Stock Purchase Plans (ESPPs), and equity compensation plans like stock options. Companies can even implement employee ownership through direct share ownership, though there are often benefits to using a more formal structure. Alternative structures play an important role in building an employee-owned economy because not every company is a good fit for an ESOP. Some selling owners want more flexibility. Others might want to ensure employees have a strong voice in governance. But perhaps the most promising use case for alternative structures is helping smaller companies become employee-owned. The setup and administrative costs of an ESOP can be prohibitive for companies under 40 people. In recent years we’ve seen a growing number of small companies using EOTs, direct share ownership, and even stock options. This encouraging trend could greatly expand the employee ownership community. Defining “Employee-Owned” If not all ESOPs are employee-owned and many employee-owned companies don’t have an ESOP, then it begs the question: How do you define employee-owned? Answering this question was priority number one when we started Certified Employee-Owned. Our vision from the very beginning has been to use certification to accelerate the creation of an employee-owned economy. Programs like Great Place to Work and Fair Trade show that certification builds support by amplifying the voice of the movement. We quickly realized that, while companies with different employee ownership structures have distinct administrative and legal concerns, they would all benefit from the visibility created by certification. With this big-tent vision in mind, we set out to create a definition of “employee-owned” that could be applied to any ownership structure. We searched extensively for historical precedent and had over 250 conversations with companies and advocates. Ultimately, we identified financial ownership as the common thread running through legislation and views of advocates from across the space. With that in mind, we focused our definition on three concepts: Ownership: At least 30% of the company must be owned by employees (excluding founders) Access: Reasonable access to ownership must be open to every employee Concentration: Ownership among employees cannot be too concentrated Stronger Together Through Certification It’s important to emphasize that the point of this definition is not to determine who is a “good” or “bad” company. Ultimately we are focused on what certification can accomplish for the employee ownership community and a necessary part of any certification program is a specific and clear delineation between who does and does not meet the standards. Setting a standard people know and trust has intrinsic value, but it also enables the creation of shared resources. Our Directory of Employee-Owned Companies is an up-to-date list of every company we know of that, to the best of our knowledge, meets the above definition of employee-owned. The directory create a simple way for people to find employee-owned companies, but it’s only possible with a clear definition of employee-owned. Our certification mark is the strongest way for a company to communicate that they meet high standards of significant and broad-based employee ownership. Over one hundred Members are using the mark on their websites and major companies like WinCo Foods and Litehouse are using the mark on widely circulated products and packaging. The foundation of this branding initiative is the trust created by third-party certification. Certification is changing the game for the entire employee ownership community, including ESOPs, and that’s why it’s important to understand the difference between “ESOP” and “employee-owned”. This article was originally posted 2/16/22 and was updated on 3/28/2023.

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