The World of Employee Ownership

"Employee ownership" refers to the ownership of a company, directly or indirectly, in part or in whole, and by some or all of its employees. Of course, a business owner can also be an employee (the CEO, etc.), but that's not what we at the NCEO—or others in this field—mean by employee ownership. Rather, we refer to ownership by a broad cross-section of employees, including rank-and-file employees, generally through a formal plan offered by the employer.

Plans for Broad-Based Employee Ownership

Before the 1970s, relatively few US workers were co-owners of the companies where they worked. However, tens of millions of Americans now participate in the stock plans discussed below.

Employee Stock Ownership Plans (ESOPs)

The main vehicle for broad-based ownership in the US is the employee stock ownership plan (ESOP). An ESOP is a tax-advantaged retirement plan (a defined contribution plan, the same family of plans as a 401(k)) that invests primarily in company stock and holds its assets in a trust, in accounts earmarked for employees. Plan participants do not directly own the stock and are, for the most part, paid out after they leave the company.

Over 6,400 companies have an ESOP, covering more than 15 million people (including both current employees and ex-employees still receiving payouts). Most ESOPs are in private companies because they provide an ideal way of buying out the original owners while providing tax benefits to them and the company, all while rewarding the employees by making them the owners. However, most participants are in public companies because in aggregate they have many more employees than private companies.

To set up an ESOP, the company creates a benefit plan and funds it with company stock, money to buy company stock, or both. Employees almost never invest their own money. Employees vest in their accounts over time (they must completely vest after no longer than six years) and receive distributions almost exclusively after leaving the company. The ESOP can own any percentage of the company.

As tax-advantaged employee benefit plans, ESOPs are subject to many rules in the Internal Revenue Code and the Employee Retirement Income Security Act (ERISA) designed to protect participants and are regulated by the IRS and Department of Labor.

To learn about ESOPs, see the resources on this site and on our main site at nceo.org.

This discussion is about US ESOPs, because the English term "ESOP," created and popularized in the US, means something else when adopted in other countries; in India, for example, it refers to stock options, which are completely different (see below).

Non-ESOP Retirement Plans: 401(k)s, Profit Sharing, and Stock Bonus Plans

Millions of employees participate in 401(k) plans, which may offer company stock as an investment alternative and/or as a company match. Like ESOPs, 401(k) plans are defined contribution plans (retirement plans that accumulate a benefit not defined in advance, unlike defined benefit plans like traditional pensions that pay a specified benefit) and may be combined with an ESOP (sometimes called a "KSOP"). Other defined contribution plans such as profit sharing plans and stock bonus plans (not to be confused with simple profit-sharing or bonus payments) may hold a substantial amount of company stock; we at the NCEO estimate there are more than 5,000 such plans that are 20% or more invested in company stock.

Employee Ownership Trusts (EOTs)

Employee ownership trusts (EOTs) are only beginning to be used in the US but are a standard form of employee ownership in the U.K. (The most notable EOT company is the 80,000-employee John Lewis Partnership in the U.K.) An EOT is a permanent trust that the company creates to buy shares from the owner(s). The EOT holds the shares and never distributes them or their cash value to departing employees, unlike an ESOP. Instead, employees are the beneficiaries of the trust and generally receive a share of the profits. EOTs in the US do not have the tax advantages or extensive legal rules that ESOPs do; on the other hand, they are comparatively inexpensive to create.

Worker Cooperatives (Co-ops)

Worker cooperatives are democratically owned and governed by employees. An employee pays a membership fee to buy a single share in the co-op and become a member, and each member has one vote. Not all employees may be members. Most cooperatives are small companies with less than 50 employees, and the total number of employee-members in US co-ops has been estimated at 7,000. For more information on worker co-ops in the US, see the United States Federation of Worker Cooperatives.

Equity Compensation Plans

Apart from broad-based plans such as ESOPs, the other main category of employee ownership is equity compensation, which refers to a grant of stock or its equivalent from the employer. A stock option plan grants employees the right to buy company stock at a specified price during a specified period once the option has vested. An employee stock purchase plan (ESPP) is a little like a stock option plan. It gives employees the chance to buy stock, usually through payroll deductions, and most often at a discount. Restricted stock plans grant or sell employees stock that they can possess only once certain restrictions (such as vesting) are met. A company may also offer an unrestricted direct grant of shares.

Phantom stock plans provide a cash bonus based on the company stock's value; there is no actual grant of shares, so it is a "phantom" grant. Restricted stock units do the same thing but pay out in shares. Stock appreciation rights (SARs) are similar to phantom stock but pay only the increase in value of the hypothetical stock grant. Stock-settled SARs pay out in stock instead of cash. (Phantom stock and SARs are the most popular equity plans in ESOP companies, where they have the advantage of not needing to use actual stock, which often is solely held by the ESOP trust.)

Plans labeled performance shares or the like refer to equity compensation grants that pay out only when certain individual or group performance targets are met.

Equity compensation is fundamentally different than plans such as ESOPs because (1) they are incentive grants, not retirement plans such an ESOP or 401(k); (2) the object is not long-term ownership such as a plan like an ESOP that holds stock in a trust, or a worker co-op owned and managed by its workers, but rather the opportunity to cash in on the stock price, especially on the public markets; and (3) except for ESPPs, which must be offered to most employees, equity compensation can be granted as few people as desired, and even ESPPs only offer most employees the opportunity to enroll in the program and buy stock, unlike ESOPs, which include most or all employees without requiring any payment from them. Thus, equity compensation can be broad-based but is not inherently broad-based. Also, equity types such as nonqualified stock options can be granted to non-employees such as contract workers and directors. (Incentive stock options and tax-qualified ESPPs can only be offered to employees.)

The NCEO is the main publisher on equity compensation, with a variety of books on equity compensation, some of which are required reading for the industry-standard Certified Equity Professional program at Santa Clara University in Silicon Valley. Equity-specific membership organizations include NASPP and GEO.

How Widespread Is Employee Ownership Overall?

As detailed in Employee Ownership by the Numbers and A Statistical Snapshot of ESOPs, more than 15 million people in the US participate in ESOPs. We have previously estimated that about 9 million people in the US hold stock options and perhaps 11 million participate in stock purchase plans. There is some overlap, so there may be approximately 25 million employees in the US (out of a private, i.e., nongovernmental, workforce of 130 million or so) participating in broad-based employee ownership programs at thousands of corporations both large and small.

What Plan Is Right for You?

Some situations have common solutions. For example, if you are a business owner who wants to sell the company in a tax-advantaged fashion, you usually should consider an ESOP. Other situations are not so cut-and-dried. See our article Forms of Employee Ownership for details. In any case, it is common for companies to have more than one stock plan.

Ownership and Control: Investment Benefits vs. Management Power vs. Employee Participation

The main benefit of employee ownership is that it gives employees the ability to benefit from the value of company stock and its growth over time. People sometimes ask whether making a company employee-owned means that workers no longer take orders from anyone, etc. This is untrue; a company with a stock plan still has managers, officers, and so on. Think of it this way: if you buy a few shares of Apple, that doesn't mean that you can walk into Apple HQ and order people around. Instead, you would acquire these shares with the expectation that they are a good investment.

On the other hand, employee-owned companies perform better and offer more fulfilling careers when they treat their employee-owners as true owners and involve them in analyzing finances and determining how their jobs are done, as discussed below.

Creating an Ownership Culture

Companies that adopt employee ownership plans do not have to treat employees any differently than before, but it will be to their advantage if they do. Many employee ownership companies have found, and research confirms, that a more participative approach to management makes for a workplace that is not only more pleasant but also more productive; see our article What the Research Says: The Impact of Employee Ownership and our book Beyond Engagement.

Employee Ownership and Economic Well-Being

As our site at ownershipeconomy.org explains, employee ownership has great potential to stabilize employment, to root productive capital in communities, and to increase the assets and incomes of working families. Our research compared young employee-owners with non-owner counterparts and found that employee ownership made a real difference in their lives. For example, the employee-owners had 33% higher median income, a 92% higher median household net wealth, and 53% more job stability when compared with non-owner peers. See our survey article Research and Data on Employee Ownership for a general look at research in the field.

Where the NCEO Fits In

We are not a business but rather a 501(c)(3) nonprofit membership organization that has been supporting the employee ownership community since 1981. Our mission is to help employee ownership thrive. We generate original research, facilitate the exchange of best practices at our live and online events, feature the best and most current writing by experts in our publications, and help employee ownership companies build ownership cultures where employees think and act like owners. We have thousands of members because we help people make smart decisions about employee ownership and network with others in the field, with everything from reliable information on technical issues to inspiration to help companies reach the full potential of employee ownership.

If You Are Outside the US

Our information about plan rules is typically US-specific. The types of employee ownership plans, and the laws applicable to them, vary from country to country. Even the same term in the same language may mean different things in different countries. For example, "ESOP" means a trust-based retirement plan in the US and a stock option plan in India. Thus, if you are outside the US, you may find our information to be of interest, but US-specific details about legal requirements will not translate to your country.