The Benefits of Employee Ownership

For any owner wishing to offer equity to their employees, employee stock ownership plans (ESOP) have a lot of tax benefits.

A lot of companies like you want to hire the best talent and help their company reach new heights. When discussing ways to attract highly skilled employees, offering employee ownership often comes up. But you may not be sure if this is a good idea for your company and your share ownership.

For any owner wishing to offer equity to their employees, employee stock ownership plans (ESOP) have a lot of tax benefits. From this, you would be able to understand why it’s a great idea to offer employee ownership and what the benefits of employee ownership are both for the company and the employees.

So, let’s begin with the importance of offering employee ownership.

Why is it important to offer Employee Ownership?

For years now, companies have been sharing ownership with their employees for many different reasons. While some people feel that it is the right thing to do, others understand the need for it so their company can grow and expand. In short, not everyone looks at the practical reasons, especially those people who feel that offering employee ownership is not right.

And that is why we have gathered some of the main benefits of offering employee ownership to the employees in your company. An often used plan for offering employee ownership are employee stock ownership plans, also known as ESOPs. Here are some reasons why you should be offering employee ownership:

  • For Tax Benefits: Some of the employee ownership plans offer a lot of tax benefits.
  • Increase the business performance: Many surveys have shown that employee-owned firms perform much better than the other closely held firms. You would see examples later in this article.
  • Raise capital: This also helps in offering additional capital as the employees would be ready to invest in the company or take lower salaries to help the company grow.
  • Share entrepreneurship: Starting a small business is very difficult and sharing the responsibility helps share the burden.
  • Buy out an owner: In almost every small business, the owners eventually would want to leave. And with no family member ready to take over and no buyers available to take the business at a reasonable price, selling the business to the employees would be a great way out.
  • Attract & retain employees: By using employee ownership plans, you can easily get the best talent in the market to work for the company and stay for a long time.

To understand the benefits of employee ownership in details, keep reading!

Increase in growth and sales

One of the main reasons why employee ownership is a great option for small companies is that it helps in growing the company. A study was conducted by Rutgers University in 2000, where 343 ESOP companies were analyzed and compared to non-ESOP companies in the same industry and area. The companies in question were of the same character and size to ensure that the results were consistent across the companies.

After these companies were analyzed, the results showed that the ESOPs companies had increased sales, sales per employee and employment by almost 2.3% to 2.4% in a year as compared to the non-ESOP companies. Moreover, it was shown that the companies performed better after they became an ESOP company as compared to before that.

In addition to this, another study was conducted in 1986 by the National Center for Employee Ownership to research the link between increased profitability and ESOPs. The result of the study changed how people viewed employee ownership. The companies involved were divided into three categories based on their employee participation in management. As per the study, the ESOP companies had a growth in the sales rate by 3.4% every year, while the employment growth rates were at 3.8% every year. From this, it was found that the companies that had a high level of employee participation showed the most gain.

After this study was done, it was then confirmed by a Government Accounting Office (GAO) covering 110 firms and using the same methodology by focusing on the profitability and productivity. As per the GAO, it was clearly seen that the productivity had increased after a company became adopted ESOPs, leading to the increase in growth and sales of the company.

Better Firm Performance

Another benefit of employee ownership is the increase in firm performance. Employee ownership easily enhances firm performance by reducing the labor-management conflict. It also serves as the collective incentive for improving organizational citizenship behavior, the corporation in a workplace, and the sharing of information.

Even though employee ownership is beneficial and can help in enhancing some parts of the company, it can be limited to the free rider problem. In short, the number of co-workers can increase and the direct incentives for better work can become weaker.

To solve this problem and make sure performance level is high, companies would have to combine employee ownership with employee participation in the decision-making. Along with that, you can also add in many other human resource policies for encouraging a sense of ownership, drawing more fully on the worker information and skills, and creating higher working norms and encouraging higher company spirit.

To verify this point, there have been many studies conducted in the past 20 years regarding how employee ownership affects the performance of a firm. The overall conclusion obtained from these studies show that productivity of the firm increases by 4% to 5% on average every year when ESOPs are adopted. Once the company becomes an ESOP company, the high productivity is maintained in the following years as well. As a matter of fact, this increase is more than twice the average annual productivity growth of the US economy over the past twenty years.

Better option for Startups and Small Companies

Not only do employees get benefits from employee ownership, but the owners also enjoy a lot of advantages as well. As startups usually do not have a lot of capital to grow at first, founders are under pressure to offer competitive salaries to new staff while balancing the little budget they have to operate their company. It’s a tough ground for all startups and small businesses mostly if they are hoping to increase their sales.

With the help of employee ownership and incorporating this idea in a startup, things can become easier for the company. To begin with, the company would get added capital. This can be from the purchase of shares by the employees, their added productivity or also from the affordable salaries set for their work in the company. The firm offering this benefit would be able to hire the best talent in the industry with flexible plans of salary plus employee ownership in the company.

With the talented staff and high productivity, the company would eventually move towards success and expansion. The sales would increase, and company performance would follow suit, as supported by the studies mentioned above. In short, the companies would be able to expand faster with ESOPs and employee ownership in place rather than if it followed the traditional method of company ownership.

Job Satisfaction and better workplace

Employee ownership doesn’t just help the company, it also helps the employees feel secure in their jobs. In fact, employees who have gained employee ownership tend to be more satisfied with their job as per various studies. Research was conducted to analyze the top 100 American companies in respect to their employees. In this competition, the organizational culture, employee attitudes, and the company outcomes that addresses the employee stock ownership were studied.

About 700 companies applied from which most of the companies were employee owned companies. And most of the companies that won the competition were ESOP firms. The employees in the company were highly satisfied with their job, and these companies were known to have the best work environment. From this we can see that offering employee ownership can help make the company environment better.

New Trend in the marketplace

From a survey taken by the National Center for Employee Ownership, it was noted that more than about 14 million private companies have taken part in ESOPs. This trend has become a part of almost every industry like the policy research industry (the company – Mathematica) and even the supermarkets (Publix), with over 8,000 companies today in the US that have retirement plans.

Per their research, an average worker in an ESOP has got the chance to accumulate an estimate of $134,000 in retirement wealth from their stake in the company. In short, the idea of offering employee ownership has become a trend that companies are adopting at a fast pace. This means that companies that have not yet taken up this should consider this idea, as many new ESOP firms are taking the top spots over other closely held private companies.

Successful companies with employee ownership

Business owners agree that the disengagement of employees in a workplace can cost the business a lot of money. And this is one of the main reasons why many companies are constantly increasing their efforts to keep their staff motivated. This has been done by not only paying the employees with competitive wages, but also by offering them with the ownership interest in the business that these employees work for.

With this said, one of the most popular ways where employees can become a part-owner of the company is via the Employee Stock Ownership Plan (ESOP). Just to help you understand why offering employee ownership in your company is a great option, here are the top six companies that are owned by their past and present employees.

Publix Super Markets

A good example of a successful case is Publix Supermarkets. This company has about 175,000 employees and has branches in about 1,112 locations in the US. This company is one of the largest employee-owned businesses. In fact, it was in 2005 when Publix had reported to have a gross sales of more than $30 billion dollars. Due to this, the company is known as the ninth-largest privately held companies in the USA by the Forbes Magazine.

The company was founded in 1930 by George W. Jenkins Jr., and today all the workers in Publix, regardless of their position, get about 8.5% of their annual salary in the form of company stock. That is mostly if they have been with the company for more than a year and have put in more than 1,000 hours of work. And because of this, the company is at a level that no other company has got to so quickly. In fact, the company was valued at around $20.8 billion in 2013. And by 2015, 20% of the company was owned by the founder, while 80% was owned by the employees.

Lifetouch

Another company is Lifetouch, which is a 100% employee-owned. The company offers photography services which include professional portrait services and yearbook printing services to families and schools across the country. It has a staff number of around 20,000, and it is doing more than double times better than any other company at the same level and with the same services.

Brookshire Brothers

In 2016, NCEO ranked the Brookshire Brothers as the 17th largest company in the USA owned completely by employees. The company has many stores throughout Louisiana and Texas. The stores types include groceries, gas stations and convenience stores. At the moment, there are more than 7,000 employees in the company.

Robert W. Baird & Co.

Another company that offered employee ownership is the Robert W. Baird & Co. It is a well-established company in the world of finance, and is entirely owned by the employees. The company invests in lower middle market companies in almost all industries. In fact, the company is said to invest about $15 to $35 million in businesses which have value between $25M and $125M, and has lower than $20 million in annual sales.

Additionally, the company also offers wealth investment banking and management services to both companies and individuals. In 2015, the value of the company was at $151 billion and the gross revenue in that year reached $1.3 billion. Along with that, the operating income was about $154 million, which was up 14% from the previous year.

Alliance Holdings

Alliance Holdings is another company that is owned completely by employees and has been doing well. It has about 15,000 employees, and the company is centered on acquiring lower-middle market companies. In fact, their current portfolio includes businesses operating in the automotive, specialty finance, and manufacturing industry. The best thing about this company is that, along with owning stake in Alliance Holdings, the employees also become part-owners of each of the portfolio companies that the business takes over.

Round Table Pizza

A California based pizza franchise, Round Table Pizza has about 500 stores across 7 states including Alaska, Washington, and Hawaii. Founded by William Larson with just $1,800 in 1959, the company has now reached another level. ESOPs were introduced in 1979, when the company began to expand.

Conclusion

With an employee ownership program in a company, it is useful to keep all the employees motivated while their interest is centered around the success of the company. There are a lot of companies that are completely or mostly owned by employees. And the best thing about these companies is that they are outperforming their non-ESOP competition.

So if you are starting your business and are hoping to grow it faster and have highly motivated staff, employee ownership is an option that can help you. Giving your employees the taste of being the owners would do wonders both for you and your company. But as you do this, do not forget to keep a track of all the shares you give out. For this, you would need a cap table application that is reliable and easy to use.

Eqvista is a great application that you can try. The best thing about this application is that it is FREE to use. This application would help you keep track of all the equity of your employee for the equity in your company. You can have your company incorporated to managing and tracking your company shares, all in one place.

Interested in issuing & managing shares?

If you want to start issuing and managing shares, Try out our Eqvista App, it is free and all online!