Want to attract and retain more employees? Maybe giving up a piece of the pie is the answer.
The number of businesses that are giving employees a share in ownership is growing. According to the National Center of Employee Ownership in 2019 (the most recent year for which data is available), 239 new Employee Stock Ownership Plans, or ESOPs, were created, covering 46,537 participants. In total, there are approximately 6,482 ESOPs in the United States, holding total assets of more than $1.6tn, and that number is growing.
Among privately held companies the number of profit-sharing, stock bonus or other defined contribution plans that are not ESOPs but are substantially (at least 20%) invested in employer stock has more than doubled in the past decade and an increasing number of my clients are starting to realize the benefits of setting up some type of employee ownership arrangement for their businesses.
Why? For three significant reasons.
The first is that employee-owned companies provide an exit for the business owner. BizBuySell, a business transaction site, recently reported that the number of businesses bought and sold are now approaching pre-pandemic levels. That shouldn’t be too surprising, given our ageing demographics (most business owners in this country are over the age of 50). But even with these motivations, there are still big challenges for people selling their businesses: namely finding a buyer and getting the right price. These problems can potentially be solved by selling one’s business to a buyer who’s most familiar with the company: its employees. Doing so not only creates an exit strategy but also possibly saves jobs.
Then there are the tax savings. Big tax savings.
In a typical employee-ownership transaction an entity owned by the company’s employees (which can include the owner) is created. That entity then buys a portion or all of the company’s shares. A bank generally finances this purchase so the employees are not out of pocket (remember: this is a benefit plan). The company pays back the bank, and gets a tax deduction by doing so. But there’s even more. The income from the company that’s allocated to the entity is also non-taxable to its owners.
Those two reasons for selling shares to your employees are persuasive enough. But there’s another, even more significant benefit: ownership makes for a more profitable company and a better place to work.
Research from Rutgers University showed companies with an employee stock ownership plan laid off fewer employees, cut fewer salaries and required less help from federal aid packages during the pandemic. According to Kaiser Permanente, employees who have equity in the companies they work for report 33% higher median income, 53% longer median job tenure and 92% higher household net worth. Employers say their profit margins are 8.5% higher and that they are three to four times more likely to retain staff. In short, employees love having a piece of the pie and they show that gratitude by working harder and staying longer.
“Being part-owner of a company is a fabulous thing because you have a little say,” one worker at an industrial laundry service in Cleveland says. “You have a little share in the company and you can also save for the future.”
Even owning a small percentage of the company where one works can have a powerful impact on motivation and job performance
Do you have to give up control completely? No.
I have a number of clients who chose to sell a portion of the businesses to their workforce while still maintaining the majority of their shares. But even owning a small percentage of the company where one works can have a powerful impact on motivation and job performance. And who knows? If things work well, the business owner always has the option of selling more stock in the future.
I don’t want to completely sugarcoat employee ownership because there are some potential obstacles to consider.
For starters, and because employee ownership arrangements are essentially benefit plans, there are tax filings and compliance requirements. The organizational structure and governance may be complicated. Each year a company must get an outside appraisal, which can be a costly exercise. And when employees leave, the company is required to buy back their shares. All those factors are considerable, but perhaps the biggest concern my clients raise is culture. Although not in all cases, when an employee owns equity they may be entitled to see more of a company’s financial information and for some business owners who want to protect their privacy that gives them pause.
So it’s important to weigh the pros and cons. And to address these concerns, a number of organizations have stepped up their efforts to increase awareness and provide advice around employee ownership. Besides the NCEO mentioned above, another great resource I’ve found is EmployeeOwnershipEquals, a newly launched initiative from a handful of non-profit organizations that advises and helps establish employee ownership plans for companies of all sizes. They’re doing it also not just for business owners, but for social reasons as well.
“Inequality in the United States is growing, with the top 10% of individuals owning more than 90% of all business wealth,” says Diane Ives of the Kendeda Fund, one of the non-profits participating on EmployeeOwnershipEquals. “Expanding employee ownership can combat this problem. According to research, if 30% of all businesses were employee owned, the net wealth of the bottom half of Americans would more than quadruple and median wealth among black households would quadruple too.”