The Many Faces of Employee Ownership
The Skinny on ESOPs, Worker-Owned Co-ops, and Everything in Between
Foundations, municipalities and businesses are working to create a more equitable capitalist system, and many are settling on worker ownership as a piece of that complex puzzle. Here’s a run-down of what the different ownership models look like and who’s doing what to give employees “skin in the game.”
By Amy Cortese
One afternoon in late November 2016, Lucy Kahn, an assistant production manager at Real Pickles, was called into a meeting with several colleagues. After a three-month process, Lucy had been approved as the food company’s latest co-owner — its ninth worker-owner named since it became an employee-owned cooperative in 2013.
She enjoyed gingerbread and congratulations, and that evening Kahn participated in her first board meeting as an owner. At the meeting, she and her fellow worker-owners came to a consensus to offer health insurance to all 22 employees.
“I felt the gravity of what we were doing together,” says Kahn, who started working at the Greenfield, Massachusetts-based pickle-maker nearly two years ago. “I got to practice all the values I committed to on the day I became a worker-owner. I felt the circle of worker-owners widen and make space for my voice. I felt the connection between our mission and our process.”
That kind of deeply felt connection is rare in today’s business world. In recent years, the employee-employer relationship has frayed as companies have outsourced and offshored jobs to cut costs. More than a third of U.S. workers are categorized as independent contract workers for hire in the “gig economy.” Meanwhile, unions, which once were workers’ strongest advocates, have seen their ranks and power erode.
Growing disparity of wealth and income has spawned renewed interest in ownership models that can help develop a more inclusive form of capitalism that shares wealth more broadly.
The USDA Rural Development has expanded its Business & Industry Loan Guarantees program to encourage rural businesspeople to sell ownership to their employees. New York City recently allocated $2.1 million, in addition to the $1.2 million it committed in 2015, to promote the formation of worker co-ops through the Worker Cooperative Business Development Initiative. The 2015 funding created 21 new worker-co-ops in the city.
Philanthropic foundations focused on economic justice are seizing on worker co-ops as part of the answer, too. “There may be few solutions that could so directly, tangibly and quickly help those hurt by the wealth gap,” Phillip Henderson, president of the Surdna Foundation, wrote in a recent op-ed in The Chronicle of Philanthropy.
“We talk about income and job creation, but wealth is a missing part of the conversation,” says Melissa Hoover, executive director of the Democracy at Work Institute, which provides research, education and advocacy related to worker co-ops. “It’s about broad-based ownership and the reintroduction of values that center on something other than profit.”
Against this backdrop, many entrepreneurs and business operators are thinking hard about questions of ownership, fairness and wealth creation.
How Many Ways Can Employees Own a Stake?
Worker-ownership structures can range from simple stock-sharing programs like at yogurt-maker Chobani, which sets aside 10 percent of the company’s shares for employees when the company goes public or is sold, to worker-owned and worker-governed cooperatives like Real Pickles.
The most common transition to employee ownership is done through an Employee Stock Ownership Plan, or ESOP — a kind of retirement plan that allocates shares over time to each employee and holds the shares in a trust until the worker leaves the company or retires, at which time the employer must buy the shares back at fair market value. New Belgium Brewing Co. and the Publix super market chain are among the roughly 7,000 ESOPs that benefit more than 13 million U.S. employees.
ESOPs only address the ownership side of the equation — they do not guarantee employees control over their company’s operations. The vast majority of ESOPs are run with a traditional, top-down structure.
Worker-owned co-ops, such as Real Pickles, are usually governed by employees, based on the principle of one worker, one vote. They are far less common than ESOPs: An estimated 350 U.S. worker-owned cooperatives employ about 5,000 people, according to the U.S. Federation of Worker Cooperatives. This is a small fraction of the 29,000 member-owned co-ops in the U.S., including consumer-owned co-ops, like credit unions, and producer-owned co-ops, such as Organic Valley and the national network of farm co-ops.
And an estimated 1.6 million partnerships, where principals in a firm, such as a law firm, share ownership, responsibility and profits, are registered in the U.S.
Worker-owned co-ops are probably the fastest-growing form of employee-owned company. Sixty percent of the nation’s worker co-ops have been created since 2000, half of those since 2010, according to a 2016 report by Project Equity and the Democracy at Work Institute.
WTF Is an ESOP?
Don’t assume employee ownership means employee control.
The formal legal framework for Employee Stock Ownership Plans (ESOPs) was passed in 1974 with the Employee Retirement Income Security Act. ESOPs were given a big boost in the ’80s with the passage of tax laws that encouraged them.
In an ESOP, the company grants shares to employees over time; the shares are held in a separate trust until employees retire or leave the company. Some ESOPs transfer a small portion of ownership to employees, while others are 100 percent owned by the trust. (Most ESOPs also offer a separate retirement plan, such as a 401(k)). Employees have no direct ownership or control.
Many business owners turn to ESOPs as a way to preserve the legacy and culture of the company, says Kenneth Serwinski, co-founder and chairman of Prairie Capital Advisors, which advises companies on ownership-transition strategies. “There’s a desire by the current ownership to see the business move to the next generation,” rather than be sold to an outside party, he says. Serwinski should know: He and his partner, both nearing retirement age, have transferred almost half of Prairie Capital’s shares into an ESOP.
ESOPs are highly regulated and can cost as much as $40,000 or $50,000 to set up. But they provide lucrative tax breaks for both the business owner selling shares and the ESOP itself.
Those tax benefits have attracted abuse, as some less than scrupulous business owners have sold shares to ESOPs at inflated prices. Although it is a small fraction of ESOPs, high-profile abuses occurred at some companies, including Enron, the Chicago Tribune and People Care Holdings.
In an ESOP, voting power rests with a board-appointed ESOP trustee, although employee-owners are able to direct the trustee on votes concerning large sales of stock or acquisitions. Most are run as traditional corporations. However, some ESOPs, including King Arthur Flour and Carris Reels, have taken extra steps to create a deeper culture of ownership and participation.
At Carris Reels, which is 100 percent employee-owned, two out of its seven board directors are drawn from nonmanagement ranks, including one salaried and one hourly wage worker. A corporate steering committee that advises management and the board comprise management and nonmanagement employee-owners. Employees have the opportunity to serve on special-purpose committees, and the company practices open-book management.
A 1986 study by the National Center for Employee Ownership (NCEO) found that employee-owned firms that practice participative management have annual growth rates 8 percent to 11 percent greater than those that don’t.
In addition to low employee-turnover rates, Carris Reels has impressive sales and profitability per employee, says Dave Fitz-Gerald, the company’s chief financial officer and a 25-year employee.
But what’s most heartening, he says, is seeing longtime workers retire comfortably thanks to the company’s success. Studies suggest that ESOP workers build bigger nest eggs, almost three times the size of employees with comparable non-ESOP plans, according to another study by the NCEO. “In the last five to 10 years, we’ve seen people able to retire comfortably at 62 instead of retiring uncomfortably at 65,” says Fitz-Gerald, who is The ESOP Association vice chair. “I do feel like we’re living proof of the research.”
Understand the Stakes
Advocates for worker ownership say employees that have a stake in a company tend to be more motivated and engaged. And they stick around. New Belgium, an ESOP, has an enviable employee-turnover rate of just 3 percent annually. And Carris Reels, a Vermont-based manufacturing company, saw its annual turnover plummet from as high as 100 percent in some facilities to 20 percent companywide after converting the firm to an ESOP.
Retaining talent was one motivation for employee ownership at Real Pickles, where the physically demanding process of fermenting large batches of vegetables makes it hard to keep workers, says Dan Rosenberg, the company’s co-founder and general manager. Kahn, for one, says she was attracted to the company’s social mission. But given the hard work — cutting cabbages and hauling bins of vegetables — without her ownership stake, she says she might have been less likely to stick around.
A comprehensive analysis of shared-ownership studies, published in the Human Resource Management Journal in 2016, reviewed data from nearly 57,000 companies around the world and concluded that employee ownership — including profit-sharing programs — can boost corporate profits by 4 percent. But the biggest benefits come when ownership is combined with participatory management.
Owners planning for retirement or moving on from the mission-driven companies they founded often would rather not sell to a bigger company or a private-equity firm because the sale could lead to layoffs, job relocations, or a change in values and culture. By selling to employees, entrepreneurs hope the jobs will remain local and the company’s mission intact.
“We have an especially strong mission and are committed to the regional food system,” says Rosenberg. “It’s hard to imagine that would ever stick if we were bought by a large food manufacturer.”
There’s new urgency around this issue: the coming “silver tsunami.” According to estimates, millions of U.S. businesses owned by aging baby boomers are likely to change hands over the next 10 to 15 years.
Business owners can reap substantial tax benefits by converting to an ESOP, including deferring capital-gains taxes on the sale proceeds. In addition, the ESOP itself benefits by using pre-tax dollars to buy shares. Similarly, owners that sell to a worker co-op may be able to defer more capital-gains taxes on the sale if they reinvest them in another company.
But it’s the employees who stand to gain the most.
The National Center for Employee Ownership reports that ESOP workers earn more in wages than workers at conventionally owned companies and are less likely to be laid off. Plus, on average, they have more than double the retirement savings of their non-ESOP counterparts.
Co-ops typically create stable jobs, especially for those on the lower rungs of the economic ladder. And profits are redistributed back to workers in the form of dividends. House cleaners that joined Prospera, a network of worker-owned co-ops in the San Francisco Bay Area, saw their median income rise from $24,000 to about $40,000, for example. These workers have built up an average of $9,219 in equity each.
The Democracy at Work Institute’s Hoover has seen a shift. At first, “people used employee-ownership models as a way to exit the economy,” she says. More recently, she notes, people are using models like worker co-ops to enter the economy. “People who have been locked out are using it as a way in.”
Women make up 68 percent of the total number of worker-owners, and people of color make up 60 percent of new worker-owners since 2010. Cooperative Home Care Associates, a Bronx, New York-based provider of home health care and the nation’s largest worker-owned cooperative with 2,300 staff, counts mostly Latina and African-American women among its 1,100 worker-owners.
Numbers aside, it’s hard to put a price on the dignity that comes with being a co-owner. “For me, it’s about empowerment,” Bertha Naranjo, a mother of four and worker-owner at Eco-Care Professional House Cleaning, a Prospera cooperative, has said.
co-owners. Photo by Kent Meireis.
At Namasté Solar, a Colorado-based solar design and installation company, converting to a worker co-op solidified its founders’ commitment to a democratic workplace and made it easier to explain the company’s values to employees, customers and potential investors. And, contrary to popular belief, the co-op structure has also allowed Namasté to raise outside capital from nonvoting investors to help it grow — from 50 employees and about $15 million in annual sales at the time of the conversion to 165 employees and $50 million in annual sales today.
Each form of employee-ownership presents unique challenges. ESOPs are more heavily regulated and can be costly to set up and administer, so they typically work best for companies with at least 20 employees.
In a worker co-op, employee-owners buy their shares in the company, as opposed to being granted stock in an ESOP. Financing those purchases and valuing the shares can be complicated. And some owners may worry that democratic decision-making could bog the company down.
Plus, a business owner transferring ownership to employees has no guarantee they will uphold the original values and mission. When the founders of Full Sail Brewing were faced with board pressure to sell their 12-year-old company in 1999, they opted instead to create an ESOP. Fifteen years later, Full Sail’s employee-owners voted unanimously to sell to a private-equity firm.
So how does a well-intentioned business owner navigate the rocky road toward a fairer deal for workers?
Money Matters
One of the key differences between ESOPs and worker-owned cooperatives, aside from how they are governed, is that ESOP employees are granted shares over time, while cooperative workers must put up their own equity capital in advance to become owners.
But that buy-in can also confer certain benefits. Namasté Solar’s founders chose to structure as a worker co-op in part because they wanted employee-owners to really feel like owners, explains Blake Jones, a co-founder and, until recently, CEO. “You need to have money at risk, skin in the game, to feel that,” he says.
A low buy-in price for employee-owners makes it affordable, but may not provide that sense of “skin in the game.” On the other hand, some co-ops have set buy-in prices much higher, such as the $16,000 buy-in cost at South Mountain Co., a home-design and building firm. That can help build the company’s balance sheet, but will price out many employees. At Cooperative Home Care Associates, which employs mainly women of color in one of the nation’s poorest neighborhoods, the price of ownership is $1,000, paid over time.
Namasté Solar set its price at $5,000. The company offers a four-year loan option that can be repaid through paycheck deductions. But employees are encouraged to find funding so they feel the decision’s weight. “We educate them on the risks, that dividends aren’t guaranteed and the investment is risky,” Jones says. “We want them to choose.”
“The idea that you put your own money into the company was definitely a challenging part,” says Logan Singletary, a Namasté co-owner who joined the company’s sales-support team fresh out of college. “I’m a young person with not a lot of capital at hand.” She knew she could potentially lose money on the investment, but ultimately sold shares she held in mutual funds that included oil and gas companies’ stock to raise money for her stake.
Valuing a company can be complex when a sole owner is selling to employees. And employees may not have the sophistication to know whether the price is fair. This has been a particular problem with some ESOPs (see “WTF Is an ESOP?” above). At the time of conversion, Namasté was valued at four to five times average cash profits from the past few years. Namasté practices open-book management, annually assesses the company’s value, and has brought in an adviser for independent review.
Employee equity alone is often not enough to buy out the business owner or fund future growth. Banks readily finance ESOP conversions, but co-ops often struggle to find financing. An ecosystem of specialized lenders has emerged to serve co-ops, including the Cooperative Fund of New England, which has lent to Real Pickles, and the National Cooperative Bank.
Cooperatives have also raised money from outside investors who have no voting rights. Real Pickles, for example, set an employee buy-in price of $6,000 per new owner. But the $30,000 provided by five initial owners was not enough to buy out the $500,000 stake owned by the founders, Rosenberg and his wife and partner, Addie Rose Holland.
Real Pickles did not have a lot in the way of collateral or physical assets that banks require. Rosenberg and Holland considered financing the buyout themselves, but they didn’t want the new worker-owners saddled with debt.
With the help of Cutting Edge Capital, Real Pickles engaged in a form of community-based crowdfunding known as a direct public offering, or DPO. Through its successful fundraising campaign, Real Pickles raised $500,000 from 77 investors, who received dividend-paying, nonvoting, nontransferable shares in return for their investment. It was the first DPO in their state. “We were the Massachusetts guinea pigs for DPOs,” says Rosenberg.
At the time of the DPO in 2013, Real Pickles had annual sales of about $750,000. In 2016, that almost doubled, to more than $1.1 million, and profits rose to $91,428, allowing the company to pay its 4-percent target dividend.
Culture Considerations
“Being employee-owned does not guarantee you have that culture,” says Namasté Solar’s Jones. “It’s a lot of little things so that people truly feel the difference and feel empowered.”
That process at Namasté starts before an employee becomes an owner. Like many co-ops, it has a candidacy period before employees can petition to become owners. At Namasté, that means a year of lessons in financial literacy and getting grounded in the principles of co-ops and democratic governance. Once an employee petitions to become a co-owner, they are assigned a colleague as a mentor. “There’s a bit of a learning curve to understand what it means to be an owner,” says Jess Roden, a co-owner and project manager for Namasté.
Similarly, when Real Pickles decided to convert to a co-op, Rosenberg and Holland invited all employees to take part in the process. Three employees joined them, working for a year and a half to write the bylaws, decide its governance structure and set a valuation. “By the time we transitioned, we were a really good functioning group,” says Rosenberg. Now, “We’re seeing people blossom in their thinking and acting like owners,” he says.
Real Pickle’s newest co-owner would agree. “It means a lot to me to show up in a workplace where I know I have a say in that workplace’s future and where I have really deep faith in how we work together,” Kahn says.
Still, democratic management is not for everyone. “If you ask most workers at ESOPs if they want more control, they’ll probably say no,” says Steve Dubb, a senior fellow with the Democracy Collaborative. “Not everyone wants to be in participatory meetings setting budgets.”
Mass Managing
In practice, co-ops run the gamut from fully participatory management to hierarchies where operational decisions are made by executives. Likewise, ESOPs are retirement programs run by directors and executives that grant company shares to employees, yet some ESOPs make an effort to involve employees in decision-making (see “WTF Is an ESOP?” above).
Real Pickles made a decision to hire professional managers to operate the business, says Rosenberg. “We’re carefully distinguishing between governance and management,” he says.
Namasté Solar takes a more participatory approach. “We’re passionate about workplace democracy,” Jones says. All stockholders vote on major governance issues, such as amending bylaws or selling stock. An elected board of directors makes key decisions, such as hiring Dave Vorlage as its new CEO to replace Jones. Most day-to-day decisions are left to teams and individuals, and peer reviews are encouraged.
“It’s not just about the speed of decision-making, it’s also about the speed of implementation,” says Jones. “Sometimes it does take us a long time to make a decision, but when a decision is made, everybody is on board.”
Namasté holds a big-picture meeting several times a year to discuss and vote on companywide decisions, such as choosing what percent of net income to give to charity each year. Its open-book policy means that every employee-owner knows the financial details, from sales and expenses to salaries.
“It’s educational to say the least,” says Namasté’s Singletary. “Every decision has a consequence that affects me directly — that’s my bottom line at the end of every year.”
Co-ops in the Sharing Economy
Some apps and websites that provide on-demand services are embracing member-ownership models.
A dizzying number of websites and apps now serve as clearinghouses for cheap, on-demand labor, from transportation (Uber and Lyft) to errands (TaskRabbit) to web design (Fiverr).
Some companies are applying co-op principles to the ideas of the digital sharing economy, including Stocksy, a stock-photo site owned and managed by its photographers and staff, and Loconomics, a San Francisco-based co-op that books everything from babysitting to reiki sessions.
Others, such as Juno, an Uber rival based in New York City, is not a co-op but has pledged to set aside half of its founding shares for its drivers.
“There’s an openness to new models,” says Matt Jorgensen, co-founder of Josephine, a startup that connects home cooks with customers. “People are innovating around the tension around inclusivity and fast decision-making.”
Josephine is exploring co-ops as well as other models. For now, the cooks are contractor-workers represented by a “Cook Council,” which held its first meeting in late 2016. The Council will help decide the ultimate form the company takes and how profits are shared. One spot on the three-member board of directors is reserved for a cook.
Jorgenson prefers to call his model “value-sharing.” The question, he says, is “How do sharing economy companies become good, ethical employers? We’re all trying to figure that out.”
The Odd Couple: Union Co-ops
Putting two forms of employee representation together to reach their common goals.
Co-ops may be an old idea, but they’re evolving. One new twist is a union-co-op model that marries collective bargaining with cooperative principles and governance. It may seem like an odd coupling, but unions and worker cooperatives share common goals. In effect, it can put the employee-owners who represent the union into negotiation with the employee-owners who represent management.
Mondragon Corp., the world’s largest worker-owned cooperative, is based in the Basque Country in northern Spain. Its collection of businesses spans manufacturing, banking and retail stores; employs about 74,000 people, 42 percent of whom are worker-owners; and generates some $12.9 billion in annual revenue. In larger co-ops like this, workers typically elect representatives, but the unique interests of factory or production workers may get lost.
“The experience of someone on the factory floor is different from that of office workers,” says Michael Peck, the North American delegate for Mondragon International and the co-founder of 1worker1vote.org, a catalyst for the concept of union-co-ops.
In 2009, the United Steelworkers union joined with Mondragon to introduce a union-co-op template. Worker-owners elect a board of directors, which appoints management as in a typical co-op. Worker-owners also elect a Union Committee that negotiates with management on issues such as wages, benefits and working conditions, and represents the co-op’s workers to the larger union.
Since then, the union-co-op model has been adopted by dozens of labor groups in 16 cities. In Cincinnati, Our Harvest, a worker-owned food-hub cooperative, was founded by the Cincinnati Union Co-op Initiative. In Denver, the Communications Workers of America Local 7777 has helped create worker-owned taxi cooperatives.
The idea is not unprecedented: New York City’s Cooperative Home Care Associates’ workers are members of the Service Employees International Union, and the co-op has maintained a joint labor and management committee for decades.
“This is about putting together the number-one force for solidarity and the number-one force for workplace democracy,” says Peck.
This article originally appeared in the Spring 2017 issue of B Magazine.
B the Change gathers and shares the voices from within the movement of people using business as a force for good and the community of certified B Corporations. The opinions expressed do not necessarily reflect those of the nonprofit B Lab.
