A company becomes employee-owned when the employer gives his/her employee’s ownership interest in his/her business. It is a way of motivating employees in addition to putting together good salary and employee benefits packages.
It is believed that employee-owners are more focused on “their company” and their attitude is better than ordinary employees. Employee-owners also seem to take their job and responsibilities more seriously. Hence they work more effectively; increasing productivity.
Giving employees an ownership interest makes them more accountable for their tasks as well as that of others as they feel that they have a stake in the achievement of a company. Types of employee-owned companies include:
Employee Stock Ownership Plan
Employee stock ownership plan is the most popular way a company follows to make employees owners. Abbreviates as ESOP, it involves employees being provided with stock ownership by their employers at no cost to the workers up front. As part of the payment for services extended, employees are given ESOP shares which are usually maintained in an ESOP trust.
These shares remain in the trust till the employee’s association with the company is terminated whether through resignation, retirement or dismissal. The company then buys back the shares from the departing employee for redistribution or voids them.
An organization where the employees combined have majority shares is referred to as an employee-owned corporation. These should not be confused with worker cooperatives as, despite many similarities, worker cooperatives always have evenly distributed company capital. Also, unlike worker cooperatives, employee-owned corporations frequently have the company executives exercising more control, power and flexibility in running the corporation.
In these ESOP centered corporations, voting rights are extended to specific shareholders and more often than not, senior workers will have more shares allocated to them compared to the new arrivals.
Benefits to employees and firm
Studies conducted have conclusively established that that employee ownership plans raise a company’s productivity and consequently profitability. The sense of ownership by employees makes them more dedicated to the cause. If the company performs well, then the employees’ financial status improves.
In cases where the company does badly, the employees’ financial risk escalates and this may have far-reaching consequences. Additionally, concentrating an employee’s investments in a single company’s stock – as ESOPs do- is not advisable. In today’s world, diversifying one’s investments is encouraged.
Other employee ownership forms
ESOP is just the most popular, but several others exist. They include: