Common Types of Employee-Owned Companies
Employee-owned companies are organized in a number of different ways:
Employee Stock Ownership Plan
Employee stock ownership plan (ESOP) companies are the most common type of employee-owned company in America.
Worker cooperatives combine employee ownership with employee governance.
Perpetual trusts are a new form of employee ownership in the US based on the UK’s John Lewis Partnership.
Direct Share Ownership
Direct share ownership (DSO) companies are the most flexible type of employee-owned company.
While these companies differ in key ways, they all have significant and broad-based employee ownership.
Q. What is employee ownership (EO)?
Employee ownership is when employees have an ownership stake in their company. Employee ownership includes employees holding shares of stock, stock options, restricted stock units (RSUs), stock appreciation rights, or anything else that gives them a legal claim on residual profits.
Nearly every company in America has some employee ownership - that is to say there is at least one employee that has some ownership stake in the business. Employee ownership can vary dramatically across companies. Sometimes a small number of employees have a large ownership stake - this would include a founder/CEO who owns 100% of her business or a group of executives who have lucrative stock options. Or every employee could have some ownership, but all together employees could own just a small piece of the business - such as employees of a large public company who receive stock options.
Q. What is an employee-owned company?
While nearly every company has some employee ownership, very few companies can truly be called "employee-owned." That’s because there is more to being an employee-owned company than having just some employee ownership.
A company is said to be employee-owned when its employees have a significant and broad-based ownership stake. Significant means that employees own at least 30% of the business. Broad-based means that meaningful access to ownership is open to every employee and that concentration of ownership is limited.
Companies can be employee-owned in a number of ways. They can use an employee stock ownership plan, a perpetual trust, direct share ownership, or become a worker cooperative.
Q. Why do companies become employee-owned?
Every employee-owned company has its own story. While some companies are employee-owned from day one, most become employee-owned through an employee ownership conversion.
The most common conversion story involves a business owner who is looking to retire but doesn’t have a succession plan in place. She wants to exit but isn't sure what to do. Maybe she doesn't have kids or her kids aren’t interested in taking over. She could sell to a competitor or private equity, but that could mean some uncomfortable changes to the company.
So this owner thinks about selling the business to her employees. An employee ownership conversion offers many advantages. The business owner gets to exit on her own timeline while ensuring her legacy will be preserved. At the same time, the employees who helped build the business are rewarded through equity ownership.
Some companies are employee-owned from the get-go. These companies tend to be started by groups with a strong passion for employee ownership.
Q. How common is employee ownership?
Employee ownership is very common, but employee-owned companies are relatively rare. As best we can tell, there are between 4,000 and 5,000 employee-owned companies in the U.S. This represents less than 0.2% of U.S. businesses with at least five employees.
Ultimately it’s hard to know exactly how many employee-owned companies there are today. Ownership structures are complicated and most, if not all, employee-owned businesses are private so they do not have to publicly report ownership information. The difficultly of determining if a company is or is not employee-owned is one of the reasons Certified EO was created.
Q. Are there any publicly-traded employee-owned companies?
Not that we know of. While there is nothing that prevents publicly-traded companies from being employee-owned, publicly-traded companies tend to be very large and it is rare that employees own enough of the company for it to be considered a significant ownership stake. There could be a few publicly-traded employee-owned companies out there that we have missed. We are looking, and it is something we hope to see more of in the future.
Q. What is an ESOP?
Employee stock ownership plans (ESOPs) are the most common vehicle of employee ownership in America. They are retirement plans that allow employees to be granted shares of company stock in individual accounts. ESOPs were created in the early 1970s with the passage of the Employee Retirement Income Security Act of 1974 (ERISA) and are recognized as "qualified defined-contribution employee benefit" plans. They experienced rapid growth in the 1980s and 1990s.
As of 2013 there were roughly 6,800 ESOPs with upwards of 10 million participants. While most employee-owned companies have an ESOP, not all companies with ESOPs are employee-owned. Many public companies have ESOPs as part of their retirement benefits, but do not have significant employee ownership. These account for the bulk of active participants in ESOPs. In 2013 private companies with ESOPs numbered 6,200 but had just 2.2 million active participants.
Q. What is a worker cooperative?
A worker cooperative is a special type of employee-owned company. What differentiates a worker cooperative is that workers participate directly in the governance of the company on a one-person/one-vote basis. This doesn’t necessarily mean that all decisions within the workplace are made by committee. At a minimum it means that workers elect some or all of the board of directors on a one-person/one-vote basis. Voting based on people, not shares, is why worker cooperatives are often referred to under the banner of economic or workplace democracy.
In the U.S. there are only 300–400 worker cooperatives and they employ less than 10,000 people. Despite their small number, worker cooperatives have high visibility and a passionate group of advocates. There are a number of notable clusters of worker cooperatives in countries such as Spain, Italy, Israel, and Argentina.