A guide to employee-owned companies

As an employee, you want to feel you contribute meaningfully to your workplace. This creates a sense of belonging and pride in your work.

And as an employer, you want to foster a collaborative and supportive environment so everyone understands how they contribute to the company’s overall success.

A great business model for cultivating this experience is an employee-owned company (EOC). EOCs have more productive employees, grow faster, and weather crises better than other companies. 

Their secret? EOC employees are incentivized to work hard and think strategically because the company’s profits directly affect their own finances.

What does employee-owned mean?

In an employee ownership setup, employees have a financial stake in the business (usually in the form of company stock). Employee ownership entitles employees to share in the company’s profits. And some ownership structures also give employees voting rights on important company decisions.

Most EOCs become employee-owned in one of two ways:

1. Some startups use employee ownership to attract talent. 

2. Some business owners who want to step down but don’t have a clear succession plan may sell their business to employees. In this situation, employee ownership is an alternative to liquidation or selling the business to an unwanted third party.

   A competitor might dismantle the company or damage its core values, for example, while a private equity firm might make deep cuts to turn a short-term profit.

3 forms of employee ownership

How do employee-owned companies work? There are three main forms of employee ownership:

1. Employee stock ownership plans (ESOPs)

ESOPs are the dominant employee ownership model in the U.S. To create an ESOP, the company takes out a loan to buy the owner’s shares and sets up a trust. The trust holds the shares on behalf of employees, creating a separate account for each employee that tracks the value of their shares.

Those who leave the company or retire receive a payout of the current value of their ESOP shares. These shares are typically “vested” over time, meaning employees must stay with the company for a set number of years to receive their full entitlement.

ESOPs may also offer participants voting rights, so they have a say regarding matters such as mergers, liquidations, or large sales.

Legally, ESOPs are retirement plans, though many businesses let employees take out no-interest loans against their shares if they’re experiencing hardship or facing an unexpected expense. They can then pay back the loans out of their paychecks.

While an ESOP is legally a retirement fund, it doesn’t replace workers’ 401(k)s. The vast majority (around 80%) of EOCs have both ESOPs and 401(k)s, and workers’ retirement funds are the sum of the two accounts. 

Additionally, 401(k)s require employees to put in funds if they want to receive company matching, while ESOPs accrue funds without workers needing to contribute anything. This makes them far more beneficial to low-income earners than 401(k)s.

Stock options are similar to an ESOP in the sense that the financial stake incentivizes excellent performance, and both plans are subject to a vesting period. But the advantage of ESOPs is that they don’t require employees to purchase stocks out of pocket, while the advantage of stock options is that they’re more flexible.

Once an employee’s stock options are fully vested, they own the stock and can hold or sell it as they wish. ESOP participants don’t have the same direct control over their stock.

2. Employee Ownership Trusts (EOTs)

EOTs are the most popular employee ownership structure in the U.K. They remain relatively rare in the U.S., though an increasing number of American companies are adopting the EOT model. EOTs usually pay out the company’s profits every year in the form of tax-free bonuses.

To create an EOT, the owner opens a trust that buys part or all of the business’s shares. The trust must include employee welfare in its designated function (the trust can also have other financial goals, such as supporting social and environmental projects).

EOTs don’t usually allow employees to weigh in on company decisions, though the company can let them choose the board of directors and create bylaws granting voting rights. 

3. Worker cooperatives

Worker cooperatives are 100% employee-owned, but it’s optional to join. That means employees who don’t wish to join the cooperative can simply work at the organization and receive their salary as they would in any other company.

Regardless of seniority, every cooperative member owns one equal share in the company and has one vote in major decisions. Worker cooperatives don’t hold company profits in a trust — they manage the business as usual and pay out profits to employees periodically, like EOTs.

Unlike ESOPs and EOTs, worker cooperatives often require employees to buy their share in the business as a lump sum or through a series of paycheck deductions.

As with EOTs, worker-owned cooperatives distribute profits at the end of a set period, typically yearly. Each employee’s profit share depends on working hours, among other factors.

Other forms of employee ownership

Here are a few more methods where employees can have a financial stake in the company:

• Restricted stock promises a future share grant to an employee under certain conditions (e.g., they usually vest after a certain period or the company achieves a particular financial goal).

• Employee stock purchase plans (ESPPs) are when companies offer employees stock at a price lower than market value.

• Phantom stock (or “shadow stock”) is a simulated stock granted to high-level executives as an incentive. While phantom stock is tied to the value of real stock, no actual shares are involved.

Benefits of employee ownership

Research shows that the benefits of employee-owned companies extend to both the company and its employees. 

The benefits to employees include the following:

• Job security: During the pandemic, while traditionally structured companies were laying off workers left and right, a Rutgers and SSRS study found that EOCs laid off 3.2 times fewer workers than companies that weren’t employee-owned. 

• Wealth building: A 2022 study by the National Center for Employee Ownership (NCEO) found that the median household net wealth of ESOP employees was 92% higher than that of employees in non-ESOP companies.

  This is especially important for low-income earners, who usually have fewer assets. The increased wealth comes partly from equity holdings and partly because low-income earners’ wages are higher in EOCs.

• Social equality: A Rutgers study found that the median net worth of Latinx employee-owners was 12 times higher than the national average for Latinx households, and Black employee-owners had a median net worth three times higher than their non-employee-owner counterparts.

  Another study revealed that income, power, and privileges are all more equally distributed in employee-owned companies.

• Lowered cost: It’s free for employees to join ESOPs and EOTs (though, as noted above, worker collectives often require financial buy-in). When workers in an ESOP leave or retire, their payout is taxed as capital gains.

• A financial safety net: Some companies offer no-interest loans against ESOP accounts that function as emergency funds, helping employees stay out of debt. 

• Financial literacy: The Rutgers study also stated that employee-owners feel the financial transparency of their firms, coupled with their own accountability for the company’s business strategy, teach them to make better financial decisions.

  Many teach what they’ve learned to family and friends, building financial literacy intergenerationally and in the broader community.

• Worker treatment: Having to come up with a payout if employees leave incentivizes EOCs to retain staff. For this reason, they usually have good healthcare plans and actively support worker well-being.

The benefits to companies include the following:

• Performance: Studies show that employee owners are more motivated and more productive.

• Handling crises: EOCs are more resilient during recessions. According to the above Rutgers and SSRS study, EOCs were less likely to cut employee pay during the pandemic and their employees were more optimistic about the company’s post-pandemic outlook.

• A culture of integrity: Employee owners behave more ethically and trust each other more.

• Tax benefits: For U.S. companies with broad-based employee ownership (in which at least 70% of the rank-and-file employees are participating in the ESOP), contributions to the trust are tax-deductible.

Drawbacks of employee ownership

Employee ownership doesn’t always go smoothly. Here are a few disadvantages to employee ownership structures:

• Commitment and good governance: Their democratic nature can make them hard to run, leading to a “short average lifespan.”

• Expenses: For ESOPs and EOTs, legal compliance usually requires professional guidance, which adds an expense. The setup costs are typically upwards of $100,000, and ongoing costs such as an independent trustee and financial advisor add additional yearly fees. 

• Consistent cash flow: The company needs to keep enough cash on hand to pay out employees who leave.

• A disincentive to let low performers go: Every time an employee leaves, the company needs to come up with cash for the payout. This may make managers reluctant to fire problematic employees.

Examples of employee-owned companies

Over 6,000 companies in the U.S. currently offer ESOPs, covering a total of 13.9 million participants.

NCEO’s employee ownership 100 list marks the biggest three employee-owned American companies as supermarkets: Publix Super Markets, WinCo Foods, and the Brookshire Grocery Company. Publix, which is 100% staff-owned, employs over 230,000 people and has been employee-owned since 1974.

The same NCEO list shows how the employee-owned business model is also popular among manufacturing and architecture firms.

The biggest employee-owned manufacturing company is W.L. Gore & Associates (makers of Gore-Tex), which currently employs over 12,000 people and also became staff-owned in 1974. And the biggest employee-owned engineering firm is HDR, Inc., with over 12,500 employees.

In the U.K., where EOTs are more common, the biggest employee-owned firm is the John Lewis Partnership, which has been staff-owned since 1929 and employs over 80,000 people.

Exploring employee ownership

It’s easy to see why employee ownership is growing in popularity as a business model. The benefits to both employees and employers mean that employee-owned companies can outperform the competition while also having happier, more engaged staff.

As an employee, entering an EOC gives you access to an unparalleled profit-sharing system that could set you and your family up for future financial security. And as a business engaging in succession planning, EOCs create an ownership culture and collective motivation that make them both great places to work and extremely competitive.

Either way, EOCs may have a great deal to offer to both you and your business.