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A Brief Overview of Employee Ownership in the U.S.

We at the National Center for Employee Ownership (NCEO) estimate that, among companies that have stock, about 36% of the work force own stock in their employers through one kind of plan or another. Those roughly 28 million employee owners represent an astonishing growth over the last 40 years, when probably not more than one million employees owned stock in their employers. This ownership comes in several forms, ranging from stock purchase plans in public companies, broadly granted stock options and similar kinds of equity awards, and employee stock ownership plans (ESOPs), a company sponsored ownership plan that holds stock in the employer for employees. The table below shows our current estimate of the extent of employee ownership in the U.S. (note that some employees may be in more than one plan, especially option and stock purchase plans).

Estimated Number of Plans and Employees; Value of Plan Assets*

Type of PlanNumber of Plans (estimated as of the end of 2011)Number of Participants (as of the end of 2011)Value of Plan Assets (as of the end of 2011)
ESOPs, stock bonus plans, & profit sharing plans primarily invested in employer stock8,92614.7 million$994.8 billionbillion
Broad-based individual equity plans 3,0009 millionnot estimated
Stock purchase plans 4,00011 million(not estimated)
*Available data do not allow us to make estimates beyond 2011 with confidence for the number of participants or plan assets.

Major Approaches to Employee Ownership

Employee Stock Ownership Plans (ESOPs): These are defined contribution plans governed by the Employee Retirement Income Security Act (ERISA). They operate through a plan trust. Generally, all full-time employees working for 1,000 hours or more per year become participants in the plans. They receive allocations of stock in their accounts from contributions made by the company and, very rarely, by their own purchases. Allocations must be made on the basis of relative pay or some more equitable formula. Allocations are subject to vesting, and vested account balances are paid out following retirement, death, disability, termination, or a diversification election open to certain plan participants.

Almost all ESOPs are in successful closely held companies and are most commonly used to buy shares from one or more owners using tax-deductible corporate funds. About 40% of all ESOPs own or will own 100% of the company. ESOPs range in size from companies with 10 or 20 employees to companies with tens of thousands.

Stock option plans and other individual equity plans: Stock options give employees the right to buy a defined number of shares over a specified period of time at a price set at the time they are granted. Options are usually subject to vesting, and vested options can usually be exercised for some defined period of time before they lapse. Options can be given to any employee on any basis the company chooses, with very limited exceptions. Restricted stock allows employers to give employees shares at current market value, but subject the awarding of these shares to vesting. Stock appreciation rights and phantom stock mimic the benefits of options and restricted stock without actually transferring any shares.

Employee Stock Purchase Plans (ESPPs): Qualified ESPPs (plans meeting the rules of Internal Revenue Code Section 423 and often called "423 plans") provide tax benefits to the employee. They are typically funded by after-tax deferrals of compensation into an account, which can be used to buy shares at the end of each "offering period," generally every three to 24 months. Up to a 15% discount may be offered, and many plans allow employees to buy shares at the price at the beginning or end of the offering period, whichever is lowest (the so-called "look back" feature").

Section 401(k) Plans: These familiar plans allow employees to make pre-tax deferrals into a company-established trust fund. These deferrals can then be invested in a variety of investments, sometimes including company stock. Employers often match employee deferrals to some extent, and, in some cases, do it by contributing company shares.

Performance

Over the last three decades, considerable research into the impact of employee ownership on companies and employees indicates that employee ownership works well for both.

On the corporate side, studies of ESOPs in closely held companies show that, relative to comparable companies, ESOP companies' sales, employment and productivity grow about two percent to three percent faster per year after they set up an ESOP than they had been growing relative to the same companies before the ESOP. In public companies, the effect is more uncertain. Some studies show a strong positive effect, others a somewhat negative impact. These plans usual own less than 10% of company stock and are rarely integral to a company's culture.

For broad-based stock options and similar plans, research also shows about a 2% per year improvement in various performance measures after a plan is implemented ("broad-based" means most employees get the awards). Almost all these plans are in public companies. There is no research on stock purchase plans, and no reason to predict an impact on corporate performance because both the rate of employee involvement in these plans and the amount they put aside is relatively low.

Both ESOPs and broad-based options and similar plans provide more wealth to employees. ESOP participants have about three times the retirement assets of comparable employees in comparable companies, and about the same amount of diversified retirement assets. They also make about 5% to 11% more per year in base pay. Participants in option plans and other broad equity plans almost never give up other benefits for the awards, so they are, by definition, "gravy."

Performance effects are not automatic, however. Research consistently shows that the companies that combine significant annual contributions to an ownership plan with regular, structured opportunities for employees to participate in decisions affecting their jobs and who routinely share information about company financial performance with employees perform far better than those who do not.

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