Types of Employee Ownership

Types of Employee Ownership
RMEOC
July 9, 2021

Employee ownership is one of the best ways to preserve your company culture, make your business more resilient, promote an inclusive workplace, and give back to your employees.

But just like a traditionally owned business, an employee owned company can take on many different forms.

That’s why comparing the different types of employee ownership is an important step in exploring whether EO is right for you.

Here’s a quick synopsis:

ESOPs work by giving employees ownership stake in their company without having to invest any of their own money. They’re best for larger companies.

Worker cooperatives operate under “one person, one vote” and feature a highly participatory workplace culture. They’re a great option for businesses with strong democratic values.

Employee ownership trusts pay out dividends of a company’s annual profits. They’re an effective method for guaranteeing that employee ownership lasts in perpetuity.

Equity compensation plans include restricted stock, stock options, profit sharing, and more. They promote broad-based ownership while requiring less time and money to set up and maintain than an ESOP.

Below, we’ll break down the key differences and major advantages of each type of employee ownership, along with case studies and additional resources to help you figure out how becoming employee owned can help your business thrive.

Note: Rather talk to an expert than read a comparison? Email us to schedule a free consultation.

Employee Stock Option Plans (ESOPs)

With roughly 6,500 companies covering 14 million workers, ESOPs are the most common form of employee ownership in the United States.

The purpose of an ESOP is to give employees ownership stake in their company without having to invest any of their own money. And practically speaking, they function a lot like a 401(K).

Company shares are allocated to employees based on an equitable formula (often a percent of wages) and placed into a trust on their behalf. After a certain vesting period, they become shareholders and claim ownership of those shares. Employees are able to withdraw those shares when they retire or leave the company.

Substantial tax breaks are one of the biggest benefits of an ESOP — in addition to the fact that companies with ESOP plans tend to grow more than 5% faster than their counterparts — though the startup and ongoing costs make them a better fit for larger companies in particular.

Learn more: What Is An ESOP and How Does It Work?

Worker Cooperatives (Co-Ops)

In a worker co-op, each worker has an equal ownership stake in the business: “one person, one vote.”

Cooperative worker-owners share responsibilities in the company and collectively participate in making major decisions through a cooperative Board of Directors. Board members are democratically elected by the worker-owners, with some co-ops (i.e. “worker collectives”) operating with a completely horizontal structure and others following a more typical management hierarchy.

Becoming a worker-owner in a co-op typically involves a buy-in and an initial candidacy period. After someone becomes a worker-owner, they’re entitled to a profit dividend typically based on the amount of hours worked (what’s known as “patronage”) since all share values are equal.

The major appeal of a cooperative is its highly participatory culture, making it one of the most effective ways to create a truly democratic and inclusive workplace that can benefit the entire community in which it operates.

Learn more: This Design Firm Found the Perfect Transition Strategy by Converting to a Worker Cooperative

Employee Ownership Trusts (EOTs)

Employee ownership trusts are like ESOPs in the sense that company shares are held by a trust administered on behalf of employees.

In an ESOP, these translate into retirement benefits. But in a trust, worker-owners receive a dividend of their company’s annual profits.

EOTs, sometimes referred to as “perpetual trusts,” are also more effective at guaranteeing that employee ownership lasts in perpetuity by protecting against an unwanted buyer. Coupled with collective decision-making in the form of democratically electing the Board of Directors, EOTs often resemble cooperatives in structure with the addition of a trust.

Out of all the different types of employee ownership, employee ownership trusts are generally the most flexible to fit the needs of the business. They also cost the least to maintain and aren’t subjected to the conventional size requirements of an ESOP.

Equity Compensation

Other types of employee ownership fall under the umbrella of broad-based equity compensation.

These involve grants of stock or stock equivalents from an employer, including restricted stock, phantom stock, stock options, stock appreciation rights, and profit sharing, among others.

Equity compensation and profit sharing plans tend to be less complex than ESOPs, and they also require much less time and money to set up and maintain.

(For a more comprehensive guide to broad-based ownership, we recommend this article from NCEO.)

Learn more: How Employee Ownership Strengthened This Construction Company’s “Family First” Culture

Conclusion

At a high level, each type of employee ownership involves transferring benefits to workers while providing meaningful engagement with the business and personal investment in its success.

ESOPs work by giving employees ownership stake in their company without having to invest any of their own money. They’re best for larger companies.
Worker cooperatives operate under “one person, one vote” and feature a highly participatory workplace culture. They’re a great option for businesses with strong deomocratic values.

Employee ownership trusts pay out dividends of a company’s annual profits. They’re an effective method for guaranteeing that employee ownership lasts in perpetuity.

Equity and profit sharing plans include restricted stock, stock options, profit sharing, and more. They promote broad-based ownership while requiring less time and money to set up and maintain than an ESOP.

Regardless of your company size, industry, or structure, there’s a type of employee ownership that can work for you.

Interested in learning more about how employee ownership can help your business thrive? We’d love to hear from you. Send us an email to schedule a free consultation.