The Committee for Effective Employee Ownership (CEEO)

Over the last three decades, broad-based employee ownership has grown rapidly within American business. Research from the National Opinion Research Center and the National Center for Employee Ownership estimates that about 25 million Americans own stock, stock options, or some combination of the two in the stock of their employers. The research on employee ownership helps explain the phenomena:

• On a consistent basis, companies with broad-based plans perform significantly better than would have been expected without them.
• Growth, productivity, and returns on assets typically increase 2-4% per year over what would be expected based on these companies' previous performance relative to their respective industries.
• Simultaneously, these plans overall add a substantial amount of additional wealth to employees.
• By contrast, increasing concentrations of ownership in top executives actually leads to a decline in corporate performance.

Challenges to the Spread of Meaningful Employee Ownership

For all its well-documented ability and potential to enable employees, companies, and shareholders to maximize their productivity, the concept of employee ownership faces substantial challenges. Most important, relatively few public companies (and even fewer institutional investors) perceive the idea of broad-based employee ownership seriously. To be sure, many companies and investors publicly commend the virtues of broad-based employee ownership and inject some principles of the concept into their 401(k) plans, profit sharing plans, or, in some cases, employee stock ownership plans (ESOPs). Some others distribute stock options widely, while many have employee stock purchase plans (ESPPs). In reality, there are only a handful of major companies-Starbucks, Southwest Airlines, Whole Foods, Science Applications International, Publix Supermarkets, and Cisco, to name a few-that strive to share significant amounts widely among their employees and make the idea of employee ownership central to their corporate strategy and culture. It is more common, unfortunately, to see public companies that focus their version of employee ownership only on a handful of top executives, based on the argument that only top executives truly matter. And in the instances where public companies have actually shared ownership with employees, it has sometimes been engineered in a way that exposes employees' retirement plans to excessive and dangerous risk. The results are the stuff of outraged headlines: top executives receiving scandalous amounts of stock options and other rewards while regular employees are left with holdings that routinely amount to only symbolic amounts or, in the worst cases, nothing at all.

In closely held companies, the concept of employee ownership has enjoyed greater successes-when used effectively, of course. Most closely held companies, however, still know too little (or nothing) about what employee ownership is and how it works. The closely held companies that do have plans often seek benchmarks to measure their progress, a way to look forward and say: "This is the kind of culture we would like to achieve."

Recent Events Bring the Issue Into Focus

The issues surrounding the concept of employee ownership have been brought into sharp focus over the recent years. Highly publicized debacles at visible companies such as Enron, WorldCom, Lucent and others, where employees' 401(k) retirement assets were heavily invested in ill-fated employer stock, or the failure of the ESOP at United Airlines, have at times cast employee ownership in a negative light and certainly made it a more contentious public issue. Meanwhile, impending accounting rules from the Financial Accounting Standards Board (FASB) will require companies to expense stock options and other forms of equity compensation on their income statements. Part of the reason that FASB has been able to move forward on this change (it was blocked by Congress when it last tried in 1995), is outrage over excessive equity awards to CEOs and other top executives. Ironically, these same concerns have motivated both political parties and Congress to unanimously express their support for the concept of broad-based ownership. These supporters note that the general experience with employee ownership has been exceptionally positive. At the same time, one leading executive after another has lauded the importance of broad-based ownership, but many of these same executives say they might scrap the idea in favor of focusing ownership on a narrower employee population if these proposed accounting rules are implemented.

At the same time, the investment community has often focused its concerns too narrowly on mechanical definitions of how much employee equity is "too much" or on whether executive programs are performance based. These concerns certainly can be legitimate, but far too little emphasis has been placed on the actual allocation of equity within employee ownership plans. Is it all or mostly going to just a few people or is it more broadly distributed, as the research shows it should be?

Goals of the CEEO Project

The CEEO's goal in this pursuit is to devise principles intended to help companies and investors make appropriate, effective choices about the distribution of equity. The CEEO will base each of its principles on objective research by scholars, advisors, and the National Center for Employee Ownership; the principles are not simply our opinion or ideology. The CEEO does not propose these principles as the basis for laws or regulations. Instead, it believes that market-proven benefits of responsible employee ownership can prove themselves without rhetoric. In order to make this happen, business and investment leaders need a deeper understanding of how these various approaches to employee ownership operate.

For all these reasons, the NCEO has convened the Committee for Effective Employee Ownership (CEEO). We have been joined in this effort by two other organizations, the Beyster Institute for Entrepreneurial Employee Ownership and the Global Equity Organizations, both of which are U.S.-based nonprofits that espouse the virtues of employee ownership and do not engage in any form of lobbying activity.

The CEEO is composed of 15 highly accomplished senior experts on various elements of employee ownership, either in ESOPs or equity pay (and sometimes both), who have worked together to develop principles for what makes employee ownership effective. The principles will focus on a limited number of areas:

1. How should companies decide who gets how much equity in a company?
2. How should executive equity pay relate to equity pay for all employees?
3. Should there be performance standards for executive equity compensation?
4. What protections should employees have against excessive risk in employee ownership plans?
5. What makes equity compensation a more or less effective strategy?
6. What information and other rights should employees have in different kinds of equity plans?

Additionally, the CEEO will develop a number of "best practice" principles on corporate culture issues such as open-book management, employee involvement, and employee communications, education, and training. Hopefully, these principles will help companies committed to employee ownership gauge their effectiveness and progress.

The CEEO recognizes these principles are not absolutes, especially given the reality that most companies will be at different stages of employee ownership culture development; in other words, what works for one company will not necessarily work for another. The CEEO does find, however, that certain common practices seem to be generally effective and worth consideration. Now that the CEEO has completed its initial deliberations, it it seeking input from a variety of companies and institutional investors. If you are interested in commenting, you can do so directly on this site or you can send your comments to NCEO executive director Corey Rosen (crosen@nceo.org).

What We Hope to Accomplish

The most critical objective of the CEEO is to demonstrate to institutional investors, the press, and companies that responsible sharing of ownership in a broad-based manner is to the benefit of companies, shareholders, and employees. This is not a quixotic goal. Recently, CalPERS, the nation's largest pension fund, decided it would vote against equity-sharing plans in large companies where top executives received more than 5% of the total amount of shares allocated to all employees. The CEO of Charles Schwab recently wrote in the Wall Street Journal that this number should be limited to 10%. Both agree that sharing ownership broadly is a better approach. Many companies are reevaluating the role of company stock in 401(k) plans and Congress almost enacted legislation on the subject. We believe that the most effective change will be change that comes not through regulation or legislation, but from companies and investors realizing that well designed, broad-based employee ownership plans can create more wealth for companies, investors, and employees alike.

Read the CEEO Principles

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CEEO Principles
The CEEO principles.

Research Appendix (PDF, 160K)

Press Release (PDF, 46K)

CEEO Members
Members of the Committee for Effective Employee Ownership (CEEO) and their biographies.

Questions or Comments?
Contact NCEO Executive Director Corey Rosen at crosen@nceo.org.