Employee Ownership and Engagement: History and Available Options
Historical Perspective on Labor and Employment
The evolution of employment and labor structures is a journey from subjugation to empowerment. Historically, individuals had little to no autonomy or rights and were often treated as subjects or property. During medieval and early modern times, people were often bound or subject to monarchs or nobles, with systems like serfdom and slavery being commonplace. Serfs worked the land under feudal lords, and slaves were forced into labor without any personal freedom.
Indentured servitude offered some people a way out, providing freedom and even passage to new lands in exchange for labor. However, this system often involved harsh conditions and limited freedoms until the debt was paid. For freemen, the 19th century workhouses provided basic sustenance in exchange for labor, albeit often under deplorable conditions.
In response to these historical injustices, the 19th and 20th centuries saw the rise of communism, which aimed for a classless society with communal ownership of the means of production. While the idealistic vision of communism sought to eliminate inequality, it largely failed to deliver on its promise of individual empowerment and economic efficiency.
In contrast, the late 20th and 21st centuries have seen the emergence of self-directed organizational models such as Holacracy, employee cooperatives and other models that promote democratic participation and collective ownership while maintaining the principles of private property and free markets of capitalism. Notable examples include Zappos, a subsidiary of Amazon, which implemented a version of Holacracy to reduce hierarchy and embrace self-directed work and the Mondragon Cooperatives in Spain, which was founded in 1956 and now employs over 80,000 people across five continents as a model of worker ownership and governance.
Establishing Employee Ownership
Transitioning to employee ownership and governance requires strategic planning and understanding of market dynamics among employees. When employees are entrusted with oversight of the business, it’s important that they grasp how market forces and competitive pressures influence business decisions.
While many employees already have a good grasp of business dynamics, additional training can help ensure they understand the need to prioritize revenues and reinvesting profits before focusing on compensation and benefits. While cash flow drives business decisions, there is established research that shows employee ownership can enhance employee engagement, leading to higher productivity, creativity and overall company performance. However, while employee ownership can enhance engagement, there is very little evidence that it is the sole determinant or a cure for troubled companies. Employee ownership offers the promise of wealth creation for employees, which also helps to build stronger communities and more sustainable economies.
Current Developments and Models for Employee Ownership
The landscape of employee ownership is diverse, with several models offering pathways to shared ownership and economic inclusion.
ESOPs (Employee Stock Ownership Plans): ESOPs are retirement plans in the U.S. that enable employees to own stock in their company, often used as a tool for business succession and enhancing employee engagement. An ESOP establishes a trust that purchases shares on behalf of employees, making them beneficial owners of the company. This model offers significant tax advantages since ESOPs are qualified retirement plans under ERISA. This status allows companies to make tax-deductible contributions to the ESOP trust, which can then be used to buy company stock. Employees do not have to purchase the shares themselves, making this an attractive benefit for recruitment and retention. The tax benefits to the selling owners and the company can be substantial, including eliminating corporate income taxes when 100% of the company is owned by the ESOP. Additionally, ESOPs require the company to buy back the shares from employees under specific rules to provide liquidity for retirement or when employees leave the company.
Employee Ownership Trusts: EOTs hold a company's shares on behalf of employees, ensuring long-term ownership. Unlike ESOPs, EOTs do not allocate shares to individual employees, thereby avoiding the financial obligations associated with share repurchases when employees depart. Instead, employees benefit from profit-sharing arrangements and contributions to retirement accounts, creating a sense of collective ownership and participation in the company’s success. EOTs are not regulated under ERISA, making them simpler and less costly to implement and administer compared to ESOPs. This flexibility makes EOTs particularly attractive for small businesses (under 25 employees) or those that may not meet the stringent requirements of ESOPs.
Employee Cooperatives: In this model, employees directly own and govern the business, sharing profits and making key decisions collectively. Employee cooperatives are a democratic form of employee ownership where the business is owned and controlled by its workers. Each employee-member has an equal share and a vote in major decisions, fostering a strong sense of ownership and accountability. Profits, known as surplus, are distributed based on hours worked or other equitable measures. This structure aligns incentives and promotes a collaborative culture where employees are actively involved in shaping the company's direction and policies. Employee cooperatives are governed by unique legal entities that vary by state, requiring specialized legal expertise to select the best state statute for a given business purpose.
Stock Options, Phantom Stock, and Stock Appreciation Rights: These financial tools allow employees to benefit from the company's growth without requiring immediate financial investment. Innovative private equity firms such as KKR use these instruments to provide ownership benefits to all employees. When KKR exits the business, the employees have a chance to benefit as well. KKR helped create the non-profit Ownership Works to promote broad-based stock options, ensuring that all employees benefit from the company's success. Stock options give employees the right to purchase company shares at a predetermined price, providing a direct stake in the company's success. Phantom stock, on the other hand, grants employees benefits equivalent to stock ownership without actually transferring shares, typically paying out in cash or stock upon vesting. Stock appreciation rights allow employees to benefit from the increase in company stock value over time, often paid in cash or shares.
Conclusion
Employee ownership represents a transformative approach to business management, offering numerous benefits for employees, businesses, and communities. By fostering a culture of engagement and shared success, companies can achieve greater stability, productivity, and inclusivity. Employees gain a tangible stake in the company’s success, enhancing their commitment and satisfaction. This collaborative approach not only boosts business performance but also contributes to a more equitable and inclusive economic environment.
About EPOCH Pi
EPOCH Pi is a Certified B Corp investment bank that serves purpose-driven companies that seek to provide both market-based financial returns while considering their broader stakeholders. Our clients range from providers of clean technology and sustainable agriculture to old-line manufacturing companies that create meaningful work environments, have positive cultures, and treat suppliers and other stakeholders equitably. Our services include merger and acquisition assistance, the formation of ESOPs and for-purpose corporations as well as raising capital for growth or generating liquidity for shareholders. In every case, one of our criteria is the alignment of our client’s business purpose and vision with those of their prospective partners. At EPOCH Pi, we have developed proprietary assessment tools that facilitate values and cultural alignment in corporate transactions. Learn more about our services here.
Employee ownership and engagement.