Addressing One Root Of Wealth Inequality Through Employee Ownership

Employee-owned firms may seem at odds with today’s focus on employees being “free agents” and taking advantage of the “gig economy,” as evidenced by the recent passing of Prop 22 in California that exempted companies like Uber and Lyft from classifying drivers as employees. However, there are many reasons that employee ownership, where employees have an ownership stake and decision-making power, may be a much more sustainable and resilient business model over the long term. In addition, as the “K-curve” recovery from COVID-19 continues to increase the divide between rich and poor, sharing ownership has proven to be one way to more evenly distribute wealth across all income levels.

In my research on purpose-driven businesses and stakeholder capitalism, various employee ownership concepts continued to surface. Employee ownership models are becoming more popular as the traditional relationship between employers and employees becomes more strained and companies look for more equitable ways to treat their employees.

Kimberly Jones, president of 100% employee-owned marketing agency Butler/Till describes that, “employee ownership is perhaps the best-kept secret of our economy. It strengthens communities, fosters a financially savvy workforce, increases resiliency during recessions, and offers big benefits during economic booms. It’s a sound choice economically, with several tax and financial incentives to its name. It also empowers employees to think and act like owners, which results in an engaged workforce, happy customers, and sustainable financial success that in turn benefits the community.”

Employee-owned businesses also have important societal implications. In an article for B the Change, Amy Cortese notes, “More than a third of U.S. workers are categorized as independent contract workers for hire in the ‘gig economy.’ Meanwhile, unions, which once were workers’ strongest advocates, have seen their ranks and power erode. Growing disparity of wealth and income has spawned renewed interest in ownership models that can help develop a more inclusive form of capitalism that shares wealth more broadly.”

Sustainable business pioneer Jeffrey Hollender, founder of Seventh Generation told me: “I don’t think you can be a responsible business without being committed to employee ownership, because otherwise your business acts as a way to concentrate wealth,” and that, “Responsible businesses have to take that head on, get over their fears about giving employees access to their financial statements, and understand they’re being agents of wealth concentration if they’re not committed to employee ownership.” 

So let’s start with understanding employee ownership more fully. 

Types of Employee Ownership

Employee ownership includes many arrangements in which a part of employee compensation or wealth is directly tied to workplace or firm performance. There are a number of different ways by which firms may adopt employee ownership, such as an employee stock ownership plan (ESOP), worker cooperatives and even stock-options.  

ESOP. ESOP as an ownership structure was created by Louis O. Kelso in 1965. It was passed through the Employee Retirement Income Security Act in 1974. The U.S. Department of Labor’s Employee Benefits Security Administration oversees ESOPs.

An ESOP is essentially a retirement plan in which the company allocates shares over time to its employees to be distributed upon their exit. That is, when the employee leaves the company or retires, the stock is bought back from them at fair market value, which leaves the employee walking away with a good sum in their pocket. 

Legally, being an ESOP does not mean that employees have direct ownership or control over the company’s operation. The shares are held in a separate trust and voting power rests with a board-appointed ESOP trustee. The vast majority of ESOPs are run as with traditional corporations with top-down structures, yet some ESOPs make an effort to empower employees as decision-makers 

Setting up an ESOP is the most common way for a company to transition to employee ownership. As of 2016, more than 6,400 companies in the U.S. sponsored an ESOP, including many well known companies such as 100% employee-owned King Arthur Baking. There are an estimated 14 million participants in ESOPs, with over $1 trillion in assets, and another 8 to 9 million recipients of stock options or restricted stock, according to inequality.org.

Employee-Owned Co-Ops. Cooperatives or co-ops are businesses owned and governed by their members who use them and return profits back to them. Their members vary from consumers, producers, workers, organizations, to governments and others. The worker co-ops form is among one of the most common types of co-ops, and another one is the producer/farmer co-ops. Co-ops are still fairly rare in the U.S. As of 2017, there were 394 worker-cooperatives in U.S., with 6,734 employees. 

In a worker cooperative, qualified employees/staff buy their shares rather than receiving them from the company. Typically, worker co-ops are governed by their employees-owners, who share the profits and make decisions democratically on a one-member, one-vote basis. A producer cooperative on the other hand is a business that is owned and operated by producers, who work either as a group or separately. Normally, producer co-ops are formed to offer their members “expanded marketing capabilities and production efficacy.” 

Stock-Options. While an ESOP or Co-op structure is a fundamental change in the corporate structure, something that many companies can do is to offer or increase stock-options available to employees. Such plans, which are especially popular among technology start-ups, may be available to all employees, or just to certain employees such as senior executives. Usually there is a vesting schedule whereby employees are able to buy stock at a reduced price after being employed for a certain time period such as one to four years. While frequently the amount of outstanding shares available for stock option plans is 10% to 15%, some companies, such as Fireclay Tile use this type of employee ownership to get to higher levels of employee ownership.

Benefits of an Employee-Ownership Model 

Besides unique tax benefits that come with the employee-ownership model, transitioning to employee ownership is considered as an excellent exit strategy for founders because selling to employees not only helps to protect the company’s legacy, mission and culture, but also to further align interests with its employees. 

Ensuring mission. Gardener’s Supply, a Vermont-based gardening company founded in 1983, adopted an ESOP and became 100% employee-owned in 2009. One of its co-founders believes that employee ownership model can help to protect the ecological mission of post-founders, to carry on the “vision of a successful business, a compassionate corporate culture and commitment to making the world a better place through gardening.” 

Similarly, Eileen Fisher decided to sell Eileen Fisher Inc. to another company but ended up selling 31% of her ownership to an ESOP “to keep the company intact with the people who’ve grown it.” And she sold some more in later years, as the company now is 40% employee owned. 

Employee ownership also adds transparency, especially when companies adopt the worker cooperative form. In many co-ops, open-book management is practiced, and democratic decision-making is done through a one-person, one-vote basis. 

Employee Engagement and Retention. The transition from employees to owners can promote their engagement with the company and its mission. For example John Abrams, co-founder and CEO of South Mountain reflected that when “the company restructured into an employee-owned cooperative, that ownership stake changed people’s views, their commitment, their level of responsibility. The people who are making business decisions bear the consequences (and the rewards) of those decisions — and they truly have the power to set the course of the business. That causes a tremendous level of engagement,” 

A study of Fortune magazine’s 100 Best Companies to Work For bears this out.  Even among this elite group, the researchers found that employees at companies that offered workers both equity compensation and profit sharing … were substantially more likely to say that their company had a collaborative management culture, that they were getting a fair share of compensation, and that their company was an ‘excellent place to work.’ They were also much more likely to say they intended to stay for a “long time. ..” and that“businesses offering these benefits had a much lower voluntary turnover rate–workers were half as likely to leave–and a return on equity 12% higher than their peers.”

It is clear that employee benefits has significant financial benefits to employee as well. In 2018, the  National Center for Employee Ownership found that workers in ESOPs obtained an average retirement balance of $170,326, which is more than twice the national average of retirement balance; in my study of New Belgium Brewing I had similar findings. Further,the NCEO study showed that “median household net wealth among respondents is 92% higher for employee-owners than for non-employee-owners. … Employee-owners are much more likely to have access to an array of benefits at work, including flexible work schedules, retirement plans, parental leave, and tuition reimbursement. …. (and)… have substantially more job stability than non-employee-owners: their median tenure with their current employer is 5.2 years, compared to 3.4 years for the non-employee-owners.”

As the economy continues to seek flexibility and new disruptors build innovative business models, we can perhaps use employee ownership as a means to better distribute the wealth generated through capitalism and help stem the increasing divide between classes in the U.S. Such a strategy is truly win-win – not only does it provide economic benefits to the company, but also employees end up being financially much better off too.