Direct Employee Ownership
Describes models for direct employee ownership, with technical details plus case studies.
By Nick Adamy, Chip Cargas, Drew Mousetis, Alexander Puskar, and Corey Rosen
Format
Description
Broad-based employee ownership in private US companies, whether for a gradual buyout or a single transaction, is mainly created through trust-based solutions. Usually, this means an employee stock ownership plan (ESOP), with employee ownership trusts as a low-cost alternative that lacks the ESOP’s detailed rules but also lacks its tax incentives.
Some companies, however, prefer direct employee ownership, where employees personally acquire and own company shares. That generally means a gradual buyout and is especially suitable for certain industries, particularly professional services such as engineering, architecture, and wealth management, and it can work well in other sectors where employees have the necessary risk tolerance and disposable income or the company provides significant contributions.
This book details two models for direct employee ownership. The Tandem Center’s model makes direct ownership easier with incentives such as matching shares, discounted shares, and/or favorable financing. A second model has employees buy interests in a partnership. This book discusses how these models work as well as the associated legal, accounting, financing, and other issues, and includes detailed case studies of companies that followed this path.
Table of Contents
1. Introduction: Direct Employee Ownership in Context
2. The Tandem Model
3. Tandem Case Studies
4. Legal Considerations Relating to Direct Employee Ownership
5. Partnerships and Employee Ownership
6. Partnerships as a Model for Broad-Based Employee Ownership
7. Creating an Ownership Culture with Direct Employee Ownership
8. Direct Employee Ownership Culture in Action
About the Authors
About the NCEO
Excerpts
From Chapter 2, "The Tandem Model"
To show how this works, we will begin with one specific way to set up direct employee ownership programs. We’ll follow that with a discussion of design variations and rollout approaches that can be used to dial in programs to work for your company. After that, we’ll drill into related programs and practices, followed by keys to success.
Ground Rules
All programs are governed by a shareholders’ agreement that provides: (1) the stock will be valued effective each December 31 (or your fiscal year-end if different) by an experienced business valuation professional to determine the fair market value of the shares, and the resulting price per share will be used for all transactions in the following year; (2) if an employee leaves the company for any reason or if a shareholder desires to sell stock, the company has the right to buy back the stock; and (3) there are other rules for buying and selling stock that must be followed.
Sample Programs
Stock Purchase
- There are two purchase opportunities per year in March and August, with a $300 minimum purchase amount and guidelines for maximum purchase amounts based on years of service and the degree to which an employee is a key driver of success. It is open to all ongoing employees (not interns or temporary employees), with no waiting period. Stock is purchased from the company. (You can do this once a year, but doing it more than twice a year may be too administratively burdensome.)
- Purchase funds are collected via a payroll deduction and put into a stock purchase savings account. There is an automatic enrollment for wages and salaries, starting at 1% of pay and increasing by 1% of pay at each annual wage or salary increase until 5% of pay is reached, with the employee able to opt out or choose different percentages.
- If an employee sells any stock, they cannot buy stock during the following five purchase opportunities.