Different Types of Employee Ownership Plans

There are many different ways for company to share equity with their employees. Some of these are familiar like stock options, others are less well known.

Some plans are "broad-based", meaning that they include most or all employees, others only include a small percentage. Some companies share a small portion of wealth with employees, others are 100% employee-owned. Here is a brief description of some of the different types of employee ownership plans that companies use.

ESOPs

ESOPs are the most popular form of broad-based employee ownership in the country. There are currently over 10,000 ESOPs covering approximately 13 million employees in the United States. In general, ESOPs include all full time employees, 21 and older, with one or more years of service. The shares are held through a trust, and distributed after the employee leaves the company. In many cases, employees have retired with ESOP accounts worth hundreds of thousands of dollars, in addition to their 401(k) and other retirement benefits.

Cooperatives

Cooperatives are also a form of broad-based employee ownership, but there are significant differences between an ESOP company and a cooperative. In addition to sharing ownership in a company, cooperatives are also governed by employees, usually through a one-employee-one-vote model. There are some examples of large cooperatives, most notably the Mondragon Corporation in the Basque region of Spain, which has over 83,000 employees. However, in the United States, worker cooperatives are often smaller companies, like the Bay Area bakery Arizmendi.

According to estimates from the U.S. Federation of Worker Cooperatives, there are currently approximately 300 worker cooperatives employing around 3,500 people in the United States. In some cases, the company is incorporated as a cooperative; in other cases, the company operates as a C or S corporation with a cooperative governance structure. For example, Namaste Solar is a C corporation where each new employee is required to purchase one, and only one, voting share of company stock. As a result, the company has a cooperative model, where each employee has an equal vote.

Other equity sharing plans

In addition to ESOPs and cooperative models, there are many types of vehicles that can put equity interests into employee hands, ranging from stock options to purchase plans to phantom stock. Each vehicle has its own unique mix of features. Tax treatment, accounting rules and motivational impact are just some of the differentiating factors. Important issues to consider are the owner or founder’s personal financial concerns, valuation of the company’s stock, federal and state securities laws, liquidity for employee shareholders and the policies and procedures of stock plan administration. When analyzed together, several employee ownership alternatives should emerge as best suited to a company’s particular needs.