Employee ownership is a term for any arrangement in which a company’s employees own shares in the company’s stock. This broad concept can take many forms in practice, ranging from simple grants of shares to highly structured plans.
Employee ownership can serve many different goals. Building employees’ retirement security, boosting company performance, providing a tax-advantaged way to sell a small business, reducing a company’s tax burden, and/or giving employees a voice in management are just some of the potential reasons that companies and business owners pursue employee ownership.
The most common structure for broad-based employee ownership in the U.S. is the employee stock ownership plan (ESOP). Approximately 6,500 U.S. companies have an ESOP, and approximately 14 million U.S. workers are ESOP participants.
An ESOP is a type of retirement plan, similar to a 401(k) plan, that invests primarily in company stock and holds its assets in a trust for employees. An ESOP may own 100% of a company’s stock, or it may own only a small percentage. ESOP participants (employees) accrue shares in the plan over time, and are paid out by having their shares bought back, typically after they leave the company.
ESOPs are often created in the process of selling a business, as an ESOP can buy a departing owner’s shares on terms that are highly favorable to the owner, the employees, and the business itself.
The other major form of employee ownership in the U.S. is equity compensation: grants of stock or stock equivalents from the employer. There are several types of equity compensation, each with different structures, incentives, and tax treatment. The most common types are:
- Stock options
- Employee stock purchase plans (ESPPs)
- Restricted stock
- Phantom stock
- Stock appreciation rights (SARs)
- Performance shares
- Direct grants
Worker co-operatives or co-ops are enterprises solely owned and governed by their workers. They are uncommon in the U.S.
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"). Other, less common employee ownership structures include perpetual trusts and direct ownership.
As detailed in our article Employee Ownership by the Numbers, over 14 million U.S. employees participate in ESOPs, about 9 million hold stock options, and perhaps 11 million participate in stock purchase plans.
From an employee’s financial perspective, 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. Most employee ownership companies have a management and governance structure similar to other companies: a board of directors, elected by shareholders, oversees the company’s activities and appoints the CEO. Employees directly vote their shares in some cases, but these are rare.
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.
We are a nonprofit membership and research organization. We serve as the leading source of unbiased information about employee ownership. 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; 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.
More Ways to Learn
- We hold dozens of online and in-person meetings throughout the year, many of them free live webinars for NCEO members.
- For lists of employee-owned companies, statistics, and other research-oriented information, see our Data page.
- For detailed reading about all employee ownership topics, see our publications.
- To get answers to a specific question, contact us or search our web archives at Find Your Resource. Additionally, our ESOP Q&A has more than 700 questions and answers about ESOPs.
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