COMMENTARY | COLUMNISTS | MICHAEL HOLLAND

Employee Ownership: The various structures and benefits

Editor's note: This article is written in advance of the Association for Corporate Growth San Diego's "How to Create, Operate and Sell a 'We Company'" event June 21. More information is available at acgsd.org.

Every time a person buys a cup of Starbucks coffee, a pound of coffee at Whole Foods Market or flies on Southwest Airlines, they are engaging with an Employee Ownership (EO) company. The goal of such plans is to give all or a significant number of employees some skin in the game, knowing that if the company performs well, they will benefit. When organizations set up EO programs, they are looking to increase profits, productivity, attract talent and boost morale.

Employee ownership structure options

There are many EO structures to keep in mind and evaluate for their potential to work in particular circumstances. Here are the most common options:

  • Direct purchase plans: This allows employees to buy shares in the company at up to a 15 percent discount with their own after-tax funds. The price is set at either the time of purchase or when the staff member began saving the funds, whichever is cheaper.
  • ESOP (Employee Stock Ownership Plan): According to the National Center for Employee Ownership (NCEO), nearly 11,000 companies have incorporated these plans and cover more than 13 million employees, making it the most common form of EO. The ESOP plan is unique because of the ability to borrow money. In this case, a business organizes an employee benefit trust that's funded by contributing cash to buy company stock, contributing shares directly or having the trust borrow money to buy stock, with the firm making contributions to the plan to enable it to repay the loan.
  • Stock options: These plans provide employees the ability to purchase a certain number of shares at a price determined at grant and typically vest incrementally over a period of time. For example, if stock prices continue to increase, the plan helps retain crucial employees. In addition, some companies incentivize staff to meet specific goals and in return, grant options based on their performance. According to the NCEO, nearly 11 million employees participate in stock options.
  • Restricted stock/restricted stock units: These options allow staff members the ability to acquire or receive shares, through means of a gift or by purchasing, when certain metrics are achieved. Some of these might include working a certain number of years or achieving goals. This is another valuable plan to help retain key employees.
  • Synthetic equity: These stock options are very attractive to some organizations for a variety of reasons. For example, the owners may want to share the economic value of equity, but not equity itself or the firm cannot offer conventional ownership plans due to corporate restrictions. The two types of synthetic equity options are Phantom Stock, the promise to pay a bonus in the form of the same value of either the value of the company shares or the increase in that value over a period of time, or Stock Appreciation Rights (SARs) that provide the right to an increase in the value of a designated number of shares over a period of time. Benefits to employees

    One of the primary advantages to employees is the ability to build wealth over their period of employment. EO companies tend to offer competitive salaries and benefits, which allow employees to have a comparable lifestyle to non-EO companies. According to Family Business Magazine, a report on all ESOP firms in the state of Washington, found that the retirement assets were nearly three times as great, and the diversified portion of employee retirement plans was about the same, as the total retirement assets of comparable employees in non-ESOP firms. Employee wages in ESOP firms are around 5 to 12 percent higher.

    Aside from the added wealth, staff members at EO firms usually work in a more positive environment with a team-oriented atmosphere and they have a better opportunity to increase retirement savings.

    Benefits to companies

    Some business owners have also found that EO plans not only lead to significantly improved productivity, but increased profits as well because staff members understand that they're contributing to the success of the company, which has a positive financial impact on them and therefore, work harder. It's no surprise that studies have found that EO companies grow faster in sales than their non-EO counterparts and improve employees' dedication and sense of ownership. A key ingredient to making this work is implementing a high degree of involvement in organizational decisions at the company.

    In addition, EO corporations have a greater opportunity to recruit key prospects because of the added benefits. Not only do these plans help attract highly sought after and committed employees, but EO plans help lessen any turnover. Lastly, EO plans are very beneficial to companies because they offer business owners the ability to take out cash if they need to.

    While Employee Ownership may not be for every company, it's certainly doing great things for many organizations and their employees, making such programs a win-win situation for everyone.


    Holland is the owner of Holland Mergers and Acquisitions Group. He can be reached at Mike@HollandMandA.com.

User Response
0 UserComments