Owners' Page: Alternative Forms of Employee Ownership
In the U.S. ESOPs are by far the most important form of broad-based employee ownership. But there are other ways employees can become owners as well.
Employee Stock Purchase Plans (ESPPs): These plans are found mostly in companies that are traded on stock exchanges. There are roughly 3,000 ESPPs and most are set up to qualify for a potential tax savings for employees. These plans allow employees to set aside a certain amount of money each paycheck over a period of time, known as the “offering period,” usually 6 to 12 months but potentially up to 27 months. At the end of that time, the saved money is used to buy company stock. Most of the plans allow the employee to buy company stock at the price as of when they first started in the ESPP or at the price when the offering period ends – whichever is lower. This means that if the price is $20 on the first day when the employee starts in the plan, and $25 at the end, the employee could buy the $25 shares for $20. Additionally, most plans provide up to a 15% discount on the price. These benefits make ESPPs a very good deal. Employees can’t lose by investing money into an ESPP. Even with all these benefits only about a third of the employees offered ESPPs chose to participate. Most plans allow all employees who meet basic service requirements to be eligible for the ESPP. The NCEO estimates that roughly 11 million employees participate in these plans.
Stock Options and Stock Grants: Approximately 8 million employees receive some form of stock grant from their company. Most of these are in companies that give grants to most of their employees. This practice is most common in the tech sector, but there are other companies that do it as well, most notably Starbucks. The grants usually are in the form of a stock option. This means that employees have the right to buy shares at the price when the award is granted for some number of years into the future, no matter how much the price increases. Another grant option is restricted grants of shares, meaning that the employee will get shares of stock only after working some number of years. Like ESPPs, these plans are found mostly in companies traded on stock exchanges.
Both ESPPs and stock grants can provide employees with a substantial benefit, but generally not at the same level as ESOPs. The benefits also tend to be skewed toward more highly paid employees who can afford easily to participate in the ESPPs or receive much larger grants of shares.
Worker Cooperatives: It is not known just how many worker cooperatives there are, but the U.S. Federation of Worker Cooperatives conservatively estimates there are approximately 500 with about 8,000 employees total. Worker cooperatives get a lot of press, foundation, and academic attention. In a worker cooperative, the employees most commonly become a member by paying a fee, usually a few hundred dollars or more, that can be deducted from their future paycheck. This is the same kind of fee that you might pay to become a member of a consumer cooperative, such as REI. Cooperatives are found mostly in the retail sector (bakeries, restaurants, bike shops, etc.), home health care, and services.
Each member has one vote for the board of directors of the cooperative, and employees usually participate in other areas of governance as well. Each year, if there is a profit, some portion is paid out to members or kept in an account where it earns interest until the employee leaves, or a combination of both. Workers generally do not share in the value of the company in the way shareholders do unless it is sold while they are working there, in which case they would get some percentage of the proceeds.
Recently there has been a very active push in many cities, often foundation funded, to encourage worker cooperative start-ups and conversions of very small companies in low-income communities.
Employee Ownership Trusts: In the United Kingdom, employee ownership trusts are their closest equivalent to U.S. ESOPs. In the trust model, also called a perpetual trust or a purpose trust, some portion or all of the company is owned by a special trust and the employees are the beneficiaries. They may have some role in its governance, but this is not required. The trust is established with the purpose of operating the company for the benefit of the employees. The goal is to be employee owned for the long term, not build the company for a sale. Unlike ESOPs, which may have to accept an offer to buy the company if the price is at a large premium over the current value, employee ownership trusts are designed not to have to sell.
In the typical trust model, the shares are held permanently by the trust. The company owner(s) will sell to the trust, most often by taking a note from the company to pay the seller back with interest over time. Employees get a dividend based on their share of the trust’s ownership. That share is based on a formula the company creates, such as relative pay, tenure, merit, or some combination thereof. Unlike ESOPs, the federal government does not set the rules. Also unlike ESOPs, the trusts have no special tax benefits, however UK trusts do receive special tax benefits. Currently, there are only a handful of such trusts in the U.S., but there is growing interest.