Employee ownership is a term for any arrangement in which a company’s employees own shares in their company or the right to the value of shares in their company. Employee ownership is a broad concept that can take many forms, ranging from simple grants of shares to highly structured plans. The most common form of employee ownership in the U.S. is the employee stock ownership plan (ESOP), a highly tax-advantaged plan in which employees own shares through a trust funded by the company. Other forms of employee ownership include stock options, stock grants, synthetic equity (granting the right to the value of shares but not the shares themselves), worker cooperatives, and employee ownership trusts.
The most common role for employee ownership plans is using an ESOP as means of business transition in closely held companies. Congress has provided substantial tax benefits for this approach. Employee ownership is also commonly used to help attract and retain employees, provide long-term wealth building, and support a high-involvement work culture where employees are given the opportunity to think and act like owners.
For a side-by-side comparison of ESOPs, equity grants, employee ownership trusts, and worker cooperatives, see the article Employee Ownership for Closely Held Companies: ESOPs vs. Equity Grants, Trusts, and Worker Cooperatives.
View the replays from our virtual learning series, Who Should Own Your Business After You? These replays explore entrusting the legacy of your business to your employees with 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, (see Employee Ownership by the Numbers).
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 in pre-tax dollars on terms that are highly favorable to the owner, the employees, and the business itself. Selling owners can sell any portion of their stock to the ESOP, and they can defer tax on the gain from the sale if certain requirements are met. Congress created incentives for ESOP to borrow money (“leveraged ESOPs”), allowing them to purchase more shares than they otherwise would be able to. Nonleveraged ESOP transactions tend to be smaller and have lower transaction costs. Companies also can use ESOPs simply as a way to reward and engage employees even if there is not a selling owner.
To learn more about how to use an ESOP for business transition, see Using an ESOP for Business Transition.
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)
To learn more about equity plan choices, see Stock Options, Restricted Stock, Phantom Stock, Stock Appreciation Rights (SARs), and Employee Stock Purchase Plans (ESPPs).
Worker cooperatives are enterprises solely owned and democratically governed by their workers. Generally, employees join the cooperative by paying a fee, and each worker gets one vote. They are most common in startups and small companies, although they are possible companies with thousands of workers.
To learn more about worker cooperatives, visit our friends at the Democracy at Work Institute.
Employee Ownership Trusts
Although relatively new in the U. S., employee ownership trusts are the primary form of employee ownership in the United Kingdom. Employee ownership trusts (EOTs) are generally purpose trusts that own some or all of the shares of a company. The trusts typically have governance documents that protect the character of the company and the interests of employees. Employees typically benefit financially through annual profit sharing.
To learn more about EOTs, read our introductory article.
Millions of employees participate in 401(k) plans, which may offer company stock as an investment alternative and/or as a company match. Such plans are often in public companies.
A number of companies offer stock bonus plans or profit-sharing plans that invest in company stock. Over 4,000 companies have such ESOP-like plans, which are governed by federal tax and retirement law, like ESOPs, but do not have the same requirements or advantages of ESOPs.
About 40% of public companies offer employee stock purchase plans (ESPPs), which allow employees to buy stock, typically at a discount and through payroll deductions.
Some private companies create their own custom plans to allow or encourage employees to buy shares. Others make stock grants to employees. Such “nonqualified” plans do not offer the tax advantages of qualified plans and must be carefully designed to avoid unintended consequences, but they do offer flexibility and low administration costs.
As detailed in Employee Ownership by the Numbers, over 14 million U.S. employees participate in ESOPs, about 9 million hold shares or share rights (e.g., stock options) they have been granted, and perhaps 11 million participate in stock purchase plans. Worker cooperatives and employee ownership trusts cover, collectively, about 20,000 employees.
From an employee’s financial perspective, the main benefit of employee ownership is that it gives employees the ability to benefit from the success of the company, often in the form of the value of company stock. 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. In ESOP companies, employees directly vote their shares in some cases, but these are rare.
Impact of Employee Ownership
There is extensive research on employee ownership and corporate performance, as reported on this site in Research on Employee Ownership and other articles such as Research on Employee Ownership, Corporate Performance, and Employee Compensation. In short, it shows that employee ownership tends to substantially improve corporate performance and employee financial well-being. A 2017 NCEO study found being in an ESOP was associated with 92% higher median household net wealth, 33% higher median income from wages, and 53% longer median job tenure (see ownershipeconomy.org).
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. It is common for companies to have more than one stock plan.
We are a nonprofit membership and research organization. Our mission is to help employee ownership thrive, and 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. See our prerecorded virtual learning series, Who Should Own Your Business After You?
- For lists of employee-owned companies, statistics, and other research-oriented information, see our Find Your Resource 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.
- For regular updates on what’s new in the employee ownership world, read our blog.
- Subscribe to our free email bulletin for highlights of the latest updates on this site, news about upcoming events, and other NCEO projects.