Equitable Economy
The Simple Concept That Turns Employee-Owners Into Millionaires
March 10, 2023
Last month we looked at three inspiring stories of employee-owners building life-changing wealth. We saw how regular grants of company stock at companies like WinCo Foods and Springfield Remanufacturing Company helped front-line workers build eye-opening account balances, in some cases over a million dollars. These stories are incredible, and perhaps even sound too good to be true. But what if I told you that these employee-owners were able to build such large amounts of wealth by leveraging the same force that billionaires like Warren Buffet used to build their wealth? The magic behind employee ownership is the magic behind all great fortunes: compound interest. In this post we’re going to take a peek under the hood at the surprising power of compound interest including: Warren Buffet’s Journey to Twelve Figures What Exactly is Compound Interest? Compound Interest Helps Employee-Owners Build Wealth The Key Ingredient is Time You’re Only Successful if Your Company is Successful This article has two big takeaways for employee owners. First, the most important factor in building wealth with employee ownership is giving compound interest plenty of time to work. Second, the better your company does, the faster your wealth will grow. Even small improvements in company performance add up to big changes thanks to compounding. Warren Buffet’s Journey to Twelve Figures Compound interest is simple to understand but can be difficult to appreciate. Imagine if I proposed the following deal: today you hand me a dollar, and a year from now I’ll come back and give you that dollar along with two dimes. Would you do it? If you’re like most people, that deal doesn’t sound exciting. But that deal, executed repeatedly and at scale, is how Warren Buffet became one of the richest people in the world. If you don’t know about the “Oracle of Omaha,” Warren Buffett is a legendary value investor with a net worth of roughly $108 billion. Buffett built his wealth as the majority owner of Berkshire Hathaway, a holding company that he took over in 1965. According to publicly available shareholder letters, over the next 50 years, Berkshire Hathaway’s stock grew at a compound growth rate of 21.6% a year. To put it another way, a single dollar invested alongside Buffett would have grown to $18,262 (source: Berkshire Hathaway Letters to Shareholders). That’s the power of compound interest. What Exactly is Compound Interest? Compound interest is when invested money earns interest on both the original amount as well as the interest already earned. Here’s a simple example. Say you invest $2,000 at an interest rate of 10% per year. In the first year, you'll earn $200 in interest, bringing your total to $2,200. In the second year, you'll earn interest on the full $2,200, which comes out to $220. This includes $200 of growth from the initial $2,000 investment plus $20 from the $200 of growth from the first year. That $20, the growth made solely from prior growth, is your first bit of compound interest. Compound interest means your money is growing at an accelerating rate. This effect starts small, but it becomes more and more powerful with time. Compound Interest Helps Employee-Owners Build Wealth Employee-owners tap into compound interest by owning shares of company stock. Their stock has a value determined by their company’s share price, which changes each year based on the value of the business. If the company’s share price goes up over multiple years, then the value of the stock grows with compound interest. While practices vary, most employee-owners receive an allocation of company stock each year paid for out of company profits. Annual allocations supercharge an employee-owners growth by building the account value in the early years while compound interest is still picking up steam. Building on the example above, say an employee-owner receives an allocation of $2,000 of stock at the end of each year and their company’s share price grows at 10% annually. Here’s how their account balance would grow initially: Our employee-owner sees $200 of share price growth in year 2 and their first compound interest in year 3. After 5 years of ownership, allocations add up to $10,000, over 80% of the total account value. In general allocations make up the bulk of an employee-owner’s account value early on, but that changes dramatically with time. The Key Ingredient is Time Let’s check in on that same employee-owner after compound interest has had time to work its magic. Let’s assume the allocations continue at $2,000 a year and the share price continues to grow at 10% annually: The first thing to notice is that our employee-owner’s total account value is accelerating. After 20 years they have over $110,000 in their account. After 25 years, they’re almost at $200,000. And after 30 years, they’re over $320,000! This acceleration is the tell-tale sign of compound growth. This example also shows how compound interest ends up driving most of the wealth building. Allocations continue, but they become less and less important as compound interest ramps up. By the end of their career, our employee-owner has accrued over 80% of their total account value from share price growth, exactly the reverse of what we saw after the first 5 years! You’re Only Successful if Your Company is Successful We started out talking about employee-owners becoming millionaires, but so far the highest account value we’ve shown is under $350k. This is where the share price growth rate factors in. After time as an owner, the next most important factor for employee-owners looking to build wealth is the success of their company. In general, the more successful a company is, the faster its share price will grow. To demonstrate the importance of company success, let’s look at how our employee-owner’s account value after 30 years changes with the rate of share price increase: For context, a 10% average annual share price is roughly what the public stock markets have returned over time. But it’s certainly possible for a successful private company to outperform this benchmark. Increased company success has a dramatic effect on our employee-owner’s account balance. Roughly speaking, a 1% annual increase in the company share price leads to changes in final account value of between $100,000 to $200,000. That’s huge! One very important caveat to all this is that no company’s share price is guaranteed to go up, and it’s possible that a series of events could lead to any company going bankrupt, which would make those company’s shares worth zero. For employee-owners, this risk is offset by the common practice that shares are paid for out of company profits, with the employee-owners not putting in any of their own money. And of course no financial gain comes without risk. What does it take for our employee-owner to become a millionaire? If their company is able to achieve a 20% rate of return over 30 years, they would retire with well over $2 million. Not every company will accomplish this, but it’s not without precedent. WinCo Foods managed to grow at roughly this rate from 1986 to 2014, a 28-year period. The minimum required performance for our employee-owner to see a seven-figure account balance is 16% annual share price growth over 30 years. Make no mistake, that is a solid performance that not every company can accomplish. But I personally have spoken to multiple employee-owned companies that have turned in this record, or better. Ultimately it comes down to how the company performs, which is something that every single employee-owner can impact through their ideas and their effort. Connecting the success of the company and the success of the employee through wealth building is perhaps the biggest reason we see employee ownership as a win-win for business and people. Note: The examples provided in this article are solely for illustrative purposes only and should not be relied upon in any way, nor should be construed as an appraisal, legal, financial, tax, or other professional advice.
Read More ▶Three Inspiring Examples of Employee-Owners Building Life-Changing Wealth
January 20, 2023
There’s a lot to like about employee ownership. By changing the relationship between the company and employee, broad-based ownership creates alignment up and down a business. Engagement is stronger, people are more motivated, relationships are more durable, and companies are more successful. But of all the positive aspects of employee ownership, the most inspiring is how it can build life-changing wealth for employee-owners. Wealth building for working people ties the employee ownership community together. Every employee ownership structure, including Employee Stock Ownership Plans (ESOPs), Worker Cooperatives, Employee Ownership Trusts (EOTs), and Direct Share Ownership, builds broad-based wealth through some combination of capital accounts and profit sharing. It was the common thread in over 250 conversations about the meaning of employee ownership we had when we set our certification standards. And while there are decades of research in support of this model, it’s the individual stories of wealth-building that inspire people to join the employee ownership movement. In this article we will touch on three inspiring examples of employee-owners building life-changing wealth. We also consider the question of scale: are these examples cherries we have picked or would a wide-spread transition to employee ownership change millions of lives? WinCo Foods WinCo Foods was founded in 1967 by Ralph Ward and Bud Williams. The no-frills, warehouse-style grocery store focused on low prices soon grew from the original location into a small chain in the Pacific Northwest. In 1985, after the passing of Mr. Ward, the company transitioned to employee ownership. Several decades of success later, the company now has over 20,000 employee-owners across 135 stores in 10 states. Broad-based ownership translated WinCo’s growth into impressive wealth-building for employee-owners. In 2014, the 130 workers at a single store in Corvallis, Oregon had a combined $100 million in ownership wealth and across the company over 400 front-line employees were “millionaire grocery clerks”. According to the most recent Department of Labor 5500s, in 2020 WinCo’s employee-owners had a combined $3.6 billion in company stock. Cathy Burch’s story illustrates the impact of WinCo’s employee ownership. Cathy joined WinCo in 1991 and worked a number of front-line jobs such as stocking shelves, doing checkout, and ordering inventory. Over the years she received small allocations of company stock and benefited from compound interest as WinCo’s share price grew at roughly 20% a year. Ownership helped Cathy build a level of wealth and security that is unimaginable for most in her position. “I have almost $1 million in stock”, she said when interviewed for Forbes in 2014, “If I wanted to, I could retire right now.” Springfield Remanufacturing Company Springfield Remanufacturing Company (SRC) is another iconic example of employee ownership building broad-based wealth. Founded in 1983 as a distressed spin-out from International Harvester, SRC’s unique approach to open-book management was born of necessity. With an 89:1 debt to equity ratio and an interest rate of 18%, the new company had to find a way to get every single employee thinking about how to save every possible dollar. The laser focus created by approaching business as a team sport not only helped SRC pay off it’s initial loan and led to a leading opening-book management system known as The Great Game of Business, but it created a lasting culture that has continued to drive SRC’s growth. Today the company has 10 divisions with over 2,000 employee-owners. SRC’s approach to employee ownership rests on thinking like an owner but also benefiting like one. The company has been 100% employee-owned from the very beginning, allowing employees like Rick Hedden to own a piece of the action. The shares Rick earned over 36 years as an employee-owner allowed him to retire early at 59 to focus on his hobbies and his family. “I wanted to be able to retire while I was healthy and I could afford it,” Rick said when interviewed for an article on the Great Game of Business Blog, “my wife and I are also enjoying having more time with each other without any pressure or timelines.” Rick is not alone. Employee ownership has helped transform SRC from a struggling spinout with a share price of 10 cents into a thriving conglomerate with a share price of over 420 dollars. Along the way, SRC has paid out over $100 million to retiring employee-owners and created 30 millionaires. New Belgium Brewing New Belgium Brewing offers a different perspective on how employee ownership can help build life-changing wealth. Founded in 1991, the Colorado-based brewer helped popularize craft beer with it’s flagship Fat Tire Ale. New Belgium transitioned part of the business to employee ownership in 2000 and then went to 100% in 2013. Unlike WinCo and SRC, New Belgium is no longer employee-owned. The company was sold to Little Lion World Beverages in 2019. How can a company that’s no longer employee-owned be an inspiring story? In an interview with Forbes, Katie Wallace, the Director of Social and Environmental Impact, shared, “ultimately, the sale was a great success story for employee ownership in that more than 300 New Belgium coworkers will receive more than $100,000 in retirement money, with some coworkers receiving quite a bit more. Over $190 million will have been paid out to hundreds of families by the time the deal closes. This is money that founders of a more traditional business could have easily pocketed themselves, so it’s an excellent win for wealth equality.” New Belgium shows that employee ownership not only creates tremendous upside, but it also creates downside protection in the case of a sale. While it’s bittersweet to see a company transition out of employee ownership, sales are a fact of business ownership and there will always be times where the best outcome for the owners is to sell. In the case of New Belgium, the sale was put in front of the employee-owners and a majority voted in favor of the deal. Does Employee Ownership Scale? WinCo, SRC, and New Belgium show how employee ownership helps workers share in the value they create and access that value in the case of a sale. But perhaps these three exceptional companies are not representative of the broader employee ownership experience. To understand the economy-wide impact of a transition to employee ownership, Certified EO teamed up with Professor Ethan Rouen at Harvard Business School to answer a simple question: what would happen if every company in America employee-owned? Analyzing data from the Federal Reserve, we demonstrated that an employee-owned economy would be an absolute game-changer. Median household wealth would rise from $121,760 to $230,076 and wealth inequality would drop to historic lows. Our analysis shows that the inspiring stories we highlighted are certainly great outcomes, but if every company in America were employee-owned, they would be common. Today these stories are a light that can guide us as we seek to change more lives through employee ownership.
Read More ▶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.
Read More ▶What Does “Employee Ownership” Mean?
September 20, 2022
Employee ownership is in the spotlight. State and federal legislation has recently advanced to promote the model. Articles discussing the advantages of employee ownership have appeared in Forbes, Nonprofit Quarterly, and Harvard Business Review. Mainstream investors are even starting to take notice with large private equity firms exploring how employee ownership could enhance their acquisitions.But what exactly does “employee ownership” mean? The big idea behind employee ownership is to distribute the rights and responsibilities of business ownership more broadly. Generally these rights and responsibilities fall into three categories.1. Ownership & MoneyAll forms of employee ownership involve expanding financial opportunity. Workers build wealth through participation in capital accounts and/or profit sharing. Common examples include stock granted through an Employee Stock Ownership Plan (ESOP), shares bought through an Employee Stock Purchase Plan (ESPP), equity upside accessed through grants of stock options, and cash received through profit sharing distributions from an Employee Ownership Trust (EOT) or Worker Cooperative. Regardless of the structure, employee ownership creates alignment by ensuring that employees benefit financially when their company is successful. A key feature across all forms of employee ownership is that participation must be ”broad-based.” Access to ownership must be open to everyone at the company and the concentration of ownership must be limited. In some cases employees are expected to pay for their ownership stake, but more frequently it is a benefit of employment. The broad-based nature of employee ownership is critical to creating the environment of trust and respect that characterizes successful examples of the model.Stories of workers building life-changing wealth present an inspiring case for employee ownership. Two examples covered in a past post illustrate this well. First is WinCo Foods. After 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.” Second is Springfield Remanufacturing Company (SRC). From 1983 through 2017, the company paid nearly $100M in distributions to its employee-owners. SRC’s CEO, Jack Stack highlights one person who “started here in 1983 making $7.50 an hour [and] has now got $1.2 million.” While the plural of “anecdote” is not “data,” most of the ESOPs I have spoken to that are at least 25 years old have created front-line millionaires. To demonstrate that these stories are not one-off examples, but instead point to the transformative potential of employee ownership, I teamed up with Professor Ethan Rouen of Harvard Business School to answer the question: what would happen to wealth inequality if every American business became employee-owned? We found that this shift would reduce wealth inequality to recorded lows and the wealth of the median household would nearly double from $121,760 to $230,076. The potential to build broad-based wealth is the common thread connecting all corners of the employee ownership community. 2. Ownership & Operational Decision MakingThe second major aspect of ownership is operational decision making. Many employee-owned companies set up practices that expand employees’ voice in setting day-to-day processes, encourage them to generate new ideas, or even increase their role in setting the company’s overall direction. Increased involvement in decision making often goes hand-in-hand with education about financial literacy and open book management. The idea is that providing workers with increased agency, access to information about the business, and the knowledge required to use this information can help them better think and act like owners, which will then improve company performance. These practices are often implemented as part of a comprehensive system such as The Great Game of Business, GRITT, or the Entrepreneurial Operating System. As an added benefit, these systems can create a more engaging and enriching environment for employees, which can also increase retention. Academic research has found substantial benefits associated with high-involvement decision making practices at employee-owned companies. Studies over the past few decades have observed higher sales growth, profitability, and survivability. A key takeaway from this work is that financial ownership alone is not enough to alter company performance. These research findings align with intuition. A company's performance is the result of all the actions taken each day by everyone at the company. Because of this, changes in behavior are necessary to see changes in outcomes. Giving employees shares of stock without creating the conditions for behavioral change seems unlikely to impact company performance. That’s why many see employee involvement in decision making as going hand-in-hand with the financial aspects of employee ownership. 3. Ownership & GovernanceThe third major aspect of ownership is governance. At some companies, workers play a role in nominating, electing, and potentially serving on the board of directors. The most common way to implement employee involvement in formal governance is through a worker cooperative. While details vary by company, the key feature of a worker cooperative is that worker-owners elect the board democratically, on a one-person, one-vote basis. In theory, this creates a situation where workers control the organization, and management is formally accountable to the workforce. Based on our list of employee-owned companies, I estimate that currently around 7% of employee-owned companies have some employee involvement in governance.Employee Ownership in PracticeIn practice there are as many different approaches to employee ownership as there are employee-owned companies. For many, employee ownership is purely about wealth-building. But others see the financial aspects of ownership and the day-to-day involvement in decision making as inseparable. The specific meaning of employee ownership can even evolve within the same company over time. For example, a company might begin their employee ownership journey through a succession plan for a departing founder and with an initial focus on long-term wealth building. But as debt is paid down, shares are distributed, and employees start to see what’s at stake, leadership might become interested in increasing financial literacy and opening up the books to help employees become even more engaged as owners. Once we recognize the different facets of employee ownership, a new question arises: what does it mean to say a company is “employee-owned?” This might seem like the same question we asked at the beginning of the article but, as we’ve discussed previously, having some employee ownership doesn’t necessarily make a company employee-owned. Consider a company that distributes a small portion of its stock to executives, or a company that provides increased voice without providing any sort of financial benefit. Are they “employee-owned?”Creating a simple and clear definition of employee-owned was the first major challenge we faced when launching Certified Employee-Owned. After speaking with roughly 250 members of the community, including trade associations, service providers, and of course companies, we arrived at a definition that focused specifically on the financial aspects of employee ownership. We felt this big tent view would maximize our ability to build support for the model while ensuring that employees at companies we certify have the opportunity to build life-changing wealth. You can read the full account of how we set a standard meaning for “employee-owned” here.
Read More ▶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 were 32.5 million American businesses in 2021, 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.
Read More ▶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.
Read More ▶Capital Accounts and Profit Sharing: The Two Ways Employee-Owners Build Wealth
April 27, 2022
Employee-owned companies are great at building 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. The National Center for Employee Ownership found that, on average, employee-owners have nearly double the retirement wealth compared to non-employee-owners ($170,326 versus $80,339). At Certified Employee-Owned, 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 from $121,760 to $230,076. 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 Accounts Capital accounts are distinct accounts that track the ownership value held by individual employees. Capital accounts can hold company stock directly or they can hold derivatives such as stock options. Employee Stock Ownership Plans (ESOPs), Employee Stock Purchase Plans (ESPPs), stock options or even direct share ownership are all forms of capital accounts. An individual’s capital account is typically funded through an initial grant or annual contributions, either made by the company as in an ESOP, or funded by the employee-owner, as in an ESPP. Today there are over 5,100 employee-owned companies using capital accounts. The key feature of capital accounts is compound growth.The value of an employee’s 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, a process known as compounding. Compound growth is how employee-owners build potentially life-changing wealth over time. Specifics vary widely, 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 wealth-building potential, the key ingredient is time. Drawing the account down will erase the compounding, and building substantial wealth typically requires the capital account is untouched for 20 years or more. Eventually the employee-owner must be able to turn the 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 will have enough cash on hand to buy back all shares at any given point in time. 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. For example, at ESOPs shares are bought back from employee-owners who have left the company, maybe because they retired. This is a time-tested practice that can continue for a long time so long as both the employee ownership plan and the company are managed well. Profit Sharing Profit sharing is when a company distributes some portion of profits back to employees as cash on a regular cadence. Profit sharing is a flexible concept that is implemented in a variety of ways and not all forms of profit sharing can be considered 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. In line with our certification standards, 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 inclusive and not overly concentrated. Formal profit-sharing benefit plans that own shares of company stock meet these criteria, but in our experience these plans rarely own enough of the company for it to qualify as “employee-owned”. Currently we see just two types of employee-owned companies where the primary wealth building mechanism is profit sharing and enough of the company is owned by the profit-sharing structure to qualify as employee-owned: Worker Cooperatives and Employee Ownership Trusts (EOTs). We know of roughly 350 companies operating through these two vehicles today. 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 is immediately useful to employee-owners. Tradeoffs Between Capital Accounts and Profit Sharing The basic structure of capital accounts and profit sharing leads to a tradeoff between timing and wealth creation that impacts people and has implications for investing in growth. Wealth Building Due to compound growth, 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. 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 to employee-owners sooner. Most capital account structures at employee-owned companies simply don’t give people the option to withdraw value before retirement because it would not be feasible for the business. 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, it simply might not be feasible to wait. While profit sharing has lower total wealth building potential, it provides greater liquidity and that tradeoff might be well-worth it for employee-owners, especially for those making a lower income. Investing in Growth The difference in payment timing between profit sharing and capital accounts has implications for how a company invests in its growth. Theoretically, the immediacy of profit sharing disincentives investing in the business, since investments reduce profit now in exchange for profit later. For example, consider a company thinking about using some excess cash this year to buy a piece of equipment that would increase profitability multiple years in the future. If employee-owners have a strong need for money now, what are they likely to choose? Capital accounts are fundamentally long-term and therefore can be much better for long-term alignment. Of course, the specific fit will likely depend quite a bit on industry. If the company is involved in a people-oriented business that involves little capital, for example consulting, profit sharing might do better in terms of aligning incentives. But if a lumpy investment is required, shares might be better. 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 have a formal profit sharing structure, and if they are owned by a profit sharing structure, such as an EOT or Worker Cooperative, it almost always owns 100% of the company. There is a major exception: discretionary profit sharing. While not technically 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 that use capital accounts for their ownership while implementing 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. 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.
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