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An Introduction to the World of Employee Ownership

What Is Employee Ownership?

"Employee ownership" refers to the ownership of a company, directly or indirectly, in part or in whole by some or all of its employees. Of course, a business owner can also be an employee (the CEO, etc.), but that's not what we at the NCEO—or others in this field—mean by employee ownership. Rather, we refer to ownership by a broad cross-section of employees, including rank-and-file employees, generally through a formal plan offered by the employer. As noted below, we are U.S.-based and our focus is on the U.S. and the plans used there.

Plans for Broad-Based Employee Ownership

Before the 1970s, relatively few U.S. workers were co-owners of the companies where they worked. However, tens of millions of Americans now participate in the stock plans discussed below.

Employee Stock Ownership Plans (ESOPs)

The main vehicle for broad-based ownership in the U.S. is the employee stock ownership plan (ESOP). An ESOP is a type of retirement plan that invests primarily in company stock and holds its assets in a trust, in accounts earmarked for employees. Plan participants do not directly own the stock and are, for the most part, paid out after they leave the company. Most ESOPs are in privately held companies, not companies that trade on the stock markets.

Equity Compensation Plans

The other main category of employee ownership is equity compensation, which refers to a grant of stock or its equivalent from the employer. A stock option plan grants employees the right to buy company stock at a specified price during a specified period once the option has vested. An employee stock purchase plan (ESPP) is a little like a stock option plan. It gives employees the chance to buy stock, usually through payroll deductions, and most often at a discount. Restricted stock plans grant or sell employees stock that they can possess only once certain restrictions (such as vesting) are met. A company may also offer an unrestricted direct grant of shares.

Phantom stock plans provide a cash bonus based on the company stock's value; there is no actual grant of shares, so it is a "phantom" grant. Restricted stock units do the same thing but pay out in shares. Stock appreciation rights (SARs) are similar to phantom stock but pay only the increase in value of the hypothetical stock grant. Stock-settled SARs pay out in stock instead of cash.

Plans labeled performance shares or the like refer to equity compensation grants that pay out only when certain individual or group performance targets are met.

Other Plans

Millions of employees participate in 401(k) plans, which may offer company stock as an investment alternative and/or as a company match. 401(k) plans may be combined with an ESOP (sometimes called a "KSOP"). Only a few thousand employees in the U.S. belong to worker cooperatives, which are enterprises solely owned and governed by their workers; our literature does not deal with cooperatives.

How Widespread Is Employee Ownership?

As detailed in our Statistical Profile of Employee Ownership, over 13 million U.S. employees participate in ESOPs, about 9 million hold stock options, and perhaps 11 million participate in stock purchase plans. There is some overlap, so there may be approximately 25 million employees in the U.S. (out of a non-governmental workforce of 120 million or so) participating in broad-based employee ownership programs at thousands of corporations both large and small.

What Plan Is Right for You?

Some situations have common solutions. For example, if you are a business owner who wants to sell the company in a tax-advantaged fashion, you usually should consider an ESOP. Other situations are not so cut-and-dried. See our article on choosing an employee stock plan for your company for details. Also see Educating Yourself to Make a Good Employee Ownership Decision. In any case, it is common for companies to have more than one stock plan.

Ownership and Control

The main benefit of employee ownership is that it gives employees the ability to benefit from the value of company stock and to benefit from increases in value. People sometimes ask whether making a company employee-owned means that workers no longer take orders from anyone, etc. This is untrue; a company with a stock plan still has managers, officers, etc. Think of it this way: if you buy some shares of IBM stock, that doesn't mean that you can walk into an IBM office and order people around. Instead, you would acquire these shares with the expectation that they are a good investment.

Creating an Ownership Culture

Companies that adopt employee ownership plans do not have to treat employees any differently than before, but it will be to their advantage if they do. Many employee ownership companies have found, and research confirms, that a more participative approach to management makes for a workplace that is not only more pleasant but also more productive; see our article Employee Ownership and Corporate Performance.

Where the NCEO Fits In

We are a private, nonprofit membership and research organization. Our goal is to serve as the leading source of complete, accurate, and unbiased information about employee ownership and to do so at the lowest possible price. We are the main publisher and research source in the field, hold dozens of Webinars and live meetings annually, and provide services to our thousands of members. As part of our commitment to providing impartial information, we do not provide ongoing consulting services; thus, we have no financial stake in whether you set up a stock plan. We do provide introductory consulting services to help you decide what to do.

As noted above, the employee stock plan itself is only part of the story; to get the full benefit from a plan, a company should communicate it to employees and treat them as the owners they are. We provide a great deal of information on this as well.

If you are not an NCEO member, you can browse the public area of our Web site and buy our books, etc. (although at higher rates), but NCEO members receive important benefits that go far beyond our membership discounts. We believe that any company or service provider involved with employee stock plans should become a member if they are not already one; see Corey Rosen's essay on this.

If You Are Outside the U.S.

Our information about plan rules is typically U.S.-specific. (We do have a book on equity compensation for multinational corporations.) The types of employee ownership plans, and the laws applicable to them, vary from country to country. Even the same term in the same language may mean different things in different countries. For example, "ESOP" means a trust-based retirement plan in the U.S. and a stock option plan in India. Thus, if you are outside the U.S., you may find our information to be of interest, but U.S.-specific details about legal requirements will not translate to your country.

For Further Exploration

We offer a vast amount of information on this ever-changing field: