What is Employee Ownership?

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. Congress created tax incentives to promote the creation of employee stock ownership plans (ESOPs), currently the most common form of employee ownership in the United States. Other forms of employee ownership include worker cooperatives, employee ownership trusts, direct employee ownership, stock options, stock grants, and synthetic equity (granting the right to the value of shares but not the shares themselves).

The most common reason companies become employee-owned is that the current owner wants to exit their ownership position and does not want to leave the business in the hands of private equity, a public company, or another outsider. In many cases, the most effective path is through an ESOP, but other forms of employee ownership can protect the character and legacy of the owner’s business as well. Our booklet Who Should Own Your Business After You? is an overview of the various forms of employee ownership and stories of business owners who chose them.

Other companies use employee ownership for other reasons, such as attracting and retaining employees, providing them long-term wealth building, and supporting 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.

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 Introduction to Employee Ownership Trusts or buy our book Using an Employee Ownership Trust for Business Transition.

A number of companies offer stock bonus plans or profit-sharing plans that invest in company stock. Some of those plans meet the requirements of federal retirement plans – over 4,000 companies have such ESOP-like plans, but do have only of the requirements and advantages of ESOPs. 

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.

Our colleagues at Tandem Center for Shared Business Success support direct employee ownership.

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.

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.

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 cases are rare.

There is extensive research on employee ownership and corporate performance. See our research overview on the impacts of employee ownership. 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. (For an overview of the field, see Who’s Who in ESOPs and Employee Ownership.) 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 hold dozens of online and in-person events throughout the year, many of them free webinars for NCEO members. 
• If you are trying to decide what form of employee ownership might be the best fit for your company, our Who Should Own Your Business After You? is available as both a booklet and a prerecorded virtual learning series.
• For detailed reading about all employee ownership topics, see our publications.
• For regular updates on what’s new in the employee ownership world, read our blog.
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