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Employee Ownership Concepts in Nonprofits and Government

2004. 126 pp. (6" x 9"), softcover. $25 for NCEO members; $35 for nonmembers.

The concept of employee ownership might not seem to be a reality to workers in the nonprofit and government sectors. After all, employees cannot truly earn shares in these organizations because there is nothing to own. This book shows how, in fact, employee ownership can be relevant in these situations. In some cases, nonprofit and government agencies transform their employees into owners, literally, by spinning off potentially for-profit aspects of their work. In others, employees may be rewarded with stakes in commercial endeavors that involve their organizations. Simultaneously, principles of "ownership culture," such as open-book management (OBM), can be used within nonprofits and government agencies.

For a PDF with the table of contents, the introduction, and a sample chapter, click here (43K; requires Adobe Acrobat Reader)

Introduction
1. Why Is Ownership Important?
2. Spinning Off an Enterprise Through an ESOP
3 Spinning Off Through a Worker Cooperative
4. Participating in Commercial Partnerships
5. Creating Equity Equivalent Plans in Nonprofits
6. Ownership Culture
Appendix A: Case Studies
Appendix B: Participative Management
Appendix C: Research on Participation
Appendix D: Stock Options and the New Section 457 Rules

Excerpts

From Chapter 1, "Why Is Ownership Important?"

What makes these employee ownership companies more successful? An NCEO study published in the 1987 September/October Harvard Business Review (Corey Rosen and Michael Quarrey, "How Well Is Employee Ownership Working?") found an explanation. Rosen and Quarrey studied many variables that might affect how an ESOP company performs, including size, industry, work force demographics, unionization, voting rights for employees (not all plans provide this), and many other factors. It turned out that only three factors counted: how much the company contributed to the plan each year; how often it communicated the plan to employees; and, most critically, how much emphasis the company placed on participative management. (By "participative management," we mean companies that give employees significant authority over daily work-level decisions, usually through employee teams. You can read more about this in the following paragraphs.) ESOP companies that were highly participative grew 8% to 11% per year faster than would have been expected, while ESOP companies that had little participation grew 6% per year more slowly than would have been expected—i.e., they had raised expectations but failed to meet them. Subsequent academic studies confirmed these findings. They also confirmed that participative management does not, by itself, provide long-term gains. After a while, employees back away from having a bigger role in helping the company prosper if they receive no long-term benefit from their efforts. A "sense of ownership" does not adequately take the place of "real ownership."

From Chapter 5, "Creating Equity Equivalent Plans in Nonprofits"

Another approach, creating a pool based on short-term goals, also has endless iterations. An organization could, for example, state that when net assets or total revenues reach a certain level, a pool of X number of dollars will be shared, and that each time revenues or assets increase another Y percent, another X number of dollars will be shared. This “bucket” approach (the bucket is emptied and refilled) gives employees meaningful targets to shoot for, and reassures board members and stakeholders that incentive compensation is provided only if the organization attains a basic level of financial security. Measuring the work of some nonprofits with purely financial goals may be difficult. After all, nonprofits are not solely focused on maximizing revenues, and, in some cases, awards based on these criteria alone can persuade employees to simply focus on financial objectives, sometimes at the cost of the organization’s mission. An alternative, therefore, is to set achievement benchmarks; for instance, a hospital might examine customer case ratings, income, staff retention, outside quality ratings, and the number of beds occupied. An advocacy group might measure new legislation, the number of new members, political action funds raised, and the number of sympathetic legislators elected. Or, a community development organization might measure success by the number of jobs created and the number of housing units built. (The case study of Trinity Services in appendix A provides a good example of this.) Clearly, the possibilities are endless, as each organization has its own objectives.

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