Do you want to attract and retain more employees? Perhaps giving up a piece of the pie is the answer.
The number of companies giving employees an ownership stake is increasing. according to National Center for Employee Ownership In 2019 (the latest year for which data is available), 239 employee stock ownership plans, or ESOPs, were created, covering 46,537 participants. In total, there are approximately 6,482 ESOPs in the United States, with total assets of over $1.6 trillion, and that number is growing.
Among privately owned companies, dividend sharing, stock bonus or other defined contribution plans that are not ESOP but are heavily invested (at least 20%) in employer equity have more than doubled in the past decade and an increasing number of my clients are starting In realizing the benefits of creating some kind of employee ownership arrangement for their business.
why? For three important reasons.
The first is that employee-owned businesses provide an outlet for the employer. BizBuySellA business website recently reported that the number of businesses bought and sold is now approaching pre-pandemic levels. This shouldn’t be too surprising, given the old demographics (most business owners in this country are over 50 years old). But even with these motivations, there are still major challenges for people selling their business: specifically finding a buyer and getting the right price. These problems can be resolved by selling the business to a buyer more familiar with the company: its employees. Doing so not only creates an exit strategy but also creates jobs.
Then there are the tax savings. Significant tax savings.
In a typical employee ownership transaction, an entity is created that is owned by the company’s employees (which can include the owner). This entity then purchases part or all of the company’s stock. The bank generally funds this purchase so employees don’t run out of pockets (remember: this is a benefits plan). The company pays the bank, and gets a tax deduction by doing so. But there is more. Income from the corporation earmarked for the entity is also non-taxable for its owners.
These two reasons for selling stock to your employees are compelling enough. But there is another, more important benefit: ownership makes the company more profitable and a better place to work.
search from Rutgers University Companies with an employee stock ownership plan have been shown to lay off fewer employees, cut fewer salaries and require less help from federal aid packages during the pandemic. to me Kaiser Permanente, employees with equity in the companies they work for report 33% higher average income, 53% higher average tenure and 92% higher average household net worth. Employers say their profit margins are 8.5% higher and they are three to four times more likely to retain employees. In short, employees love to have a piece of the pie and show that gratitude by working harder and staying longer.
“Being a part-owner of a business is great because you have little say,” said a Cleveland industrial laundry worker. Says. “You have a small stake in the company and you can also save for the future.”
Should you give up control completely? no.
I have a number of clients who have chosen to sell a portion of the business to their workforce while keeping the majority of their stock. But even owning a small percentage of the company where one works can have a strong impact on motivation and job performance. And who knows? If all goes well, the business owner always has the option to sell more shares in the future.
I don’t want to completely hide employee ownership because there are some potential hurdles to consider.
For starters, because employee ownership arrangements are essentially benefit plans, there are tax returns and compliance requirements. The organizational structure and governance may be complex. Each year, the company must obtain an external appraisal, which can be a costly exercise. And when the employees leave, the company has to buy back their shares. All of these factors are great, but perhaps the biggest concern my clients have is culture. Although not in all cases, when an employee owns equity, they may be entitled to see more of the company’s financial information and for some business owners who want to protect their privacy, this gives them pause.
So it is important to weigh the pros and cons. To address these concerns, a number of organizations have stepped up efforts to raise awareness and provide advice about employee ownership. Besides the aforementioned NCEO, another great resource I’ve found is EmployeeOwnershipEquals. Property rights, a newly launched initiative of a handful of nonprofit organizations that provides advice and assistance in developing employee ownership plans for businesses of all sizes. They also do this not only for business owners, but for social reasons as well.
“Inequality is growing in the United States, with the largest 10% of individuals owning more than 90% of all business wealth,” says Diane Ives of the Kinda Fund, a nonprofit participating in EmployeeOwnershipEquals. Expanding employee ownership can combat this problem. According to research, if 30% of all businesses were employee-owned, the net worth of the bottom half of Americans would quadruple and the median wealth among black households would also quadruple.”