In these times of rampant income inequality, for entrepreneurs who want all of their workers to get a bigger piece of the pie, there are two particularly noteworthy options: employee stock ownership plans (ESOPs) and worker cooperatives. And thanks to the Great Recession and the imminent mass retirement of baby boomers, interest in them is growing.
That’s according to a recent report published by the Surdna Foundation. Called Ours to Share: How Worker-Ownership Can Change the American Economy, the research examines these two flavors of employee ownership.
“At their most basic level, worker co-ops and ESOPs make working people into part-owners of the enterprises where they are employed,” says Sanjay Pinto, a sociologist and author of the report.
According to Pinto, this increased interest is a direct result of the Great Recession, which triggered more enthusiasm for economic alternatives. In addition, as an increasing number of baby boomers reach retirement age, they’re looking for ways to cash out that also benefit long-time employees.
Plus, according to the report, despite common wisdom, ESOPs and worker co-ops tend to be as efficient and productive as conventional companies. Also research shows that, in ESOPs and/or co-ops, workers have more job security and build greater wealth over time. Pinto likens the situation to high-tech firms in Silicon Valley that hand out share ownership as a way of motivating employees to work hard and stick around (although that tends to be more of a thing for higher-level folks).
While the numbers of worker co-ops in the U.S. still are pretty low, they’ve grown considerably recently, according to Pinto. There are around 300 to 400 in existence now; 80 or so were started from 2010-2013.
In these set-ups, members, who are workers, have equal shares in the company and equal votes. “It’s a way to organize enterprises in which broad-based ownership is coupled with broad-based control,” says Pinto. Example: Evergreen Cooperatives Initiative in Cleveland, which was launched in 2008. It has three worker-owned businesses—a laundry service, a sustainable energy provider and a greenhouse–aimed at helping low-income residents reap the benefits of providing services to the schools and health-care institutions in the University Circle neighborhood.
At the same time, the total number of worker-owned co-ops is still underwhelming. Why? The report points to a few factors, but most important may be problems raising capital from banks and other lending institutions. “Despite evidence showing that worker cooperatives are just as productive as conventional firms, and no more likely to fail, most mainstream lending institutions are not armed with this set of facts. So the perception that worker cooperatives are some kind of novelty, unlikely to succeed, is likely to color their perceptions and lending decisions,” says the report.
There’s considerably more activity in the ESOP realm: About 7,000 businesses employing 13.5 million workers use this structure. These retirement trusts, which invest in company stock and hold assets in individual employee accounts, were established with the passage of the Employee Retirement Insurance and Security Act (ERISA) of 1973. Workers have anywhere from 30% to 100% of share ownership, though most are not majority worker-held. The governing structures of these organizations range across the map, from giving workers added benefits to something resembling a co-op; all plans have to give employees some voting rights regarding matters such as mergers, acquisitions and liquidations.
Of course, in any case, entrepreneurs should make sure employees know they have to diversify their portfolios. “You can’t put all your eggs in one basket,” says Pinto.
