Employee stock ownership
Employee stock ownership, or employee share ownership, is an ownership interest in a company held by the company's workforce. The ownership interest may be facilitated by the company as part of employees' remuneration or incentive compensation for work performed, or the company itself may be employee owned.
Some corporations are majority employee-owned; the term "employee-owned corporation" often refers to such companies. Such organizations are similar to worker cooperatives, but unlike cooperatives, control of the company's capital is not necessarily evenly distributed. In many cases, voting rights are given only to certain shareholders, and more senior employees may be allocated more shares than new hires; typically, they are tied to the compensation an employee receives from the company.
Most corporations, however, use stock ownership plans as a form of employee benefit, to maintain a specific corporate culture, or as a way to prevent hostile takeovers. The plans generally prevent average employees from holding too much of the company's stock. Compared with cooperatives therefore, employee share ownership may not confer any meaningful control, or allow for company executives to have flexibility and control in governing and managing the corporation.
To facilitate employee stock ownership, companies may allocate their employees with stock, which may be at no upfront cost to the employee, or enable the employee to purchase stock, which may be at a discount or through a tax-efficient scheme. Shares allocated to employees may have a holding period before they vest to the employee.
Various types of employee stock ownership plans are common in most industrial and some developing countries. In the United States there is a widespread practice of sharing this kind of ownership broadly with employees. The tax rules for employee ownership vary widely from country to country. Only a few, most notably the U.S., the UK, and Ireland have significant tax laws to encourage broad-based employee ownership. For example, in the U.S. there are specific rules for Employee Stock Ownership Plans (ESOPs). In India, employee stock option plans are called "ESOPs”.
The most celebrated (and studied) case of a multinational corporation based wholly on worker-ownership principles is the Spanish company Mondragon Cooperative Corporation. Unlike in the United States, however, Spanish law requires that members of the Mondragon Corporation are registered as self-employed. This differentiates co-operative ownership (in which self-employed owner-members each have one voting share, or shares are controlled by a co-operative legal entity) from employee ownership (where ownership is typically held as a block of shares on behalf of employees using an Employee Benefit Trust, or company rules embed mechanisms for distributing shares to employees and ensuring they remain majority shareholders).
Different forms of employee ownership, and the principles that underlie them, are strongly associated with the emergence of an international social enterprise movement. Key agents of employee ownership, such as Co-operatives UK and the Employee Ownership Association (EOA), play an active role in promoting employee ownership as a de facto standard for the development of social enterprises.
Varieties of employee ownership include:
Direct purchase plans
Direct purchase plans simply allow employees to buy shares in the company with their own money. In several other countries, there are special tax-qualified plans that allow employees to buy stock either at a discount or with matching shares from the company. For instance, in the U.S., employee stock purchase plans enable employees to put aside after-tax pay over some period of time (typically 6–12 months) then use the accumulated funds to buy shares at up to a 15% discount at either the price at the time of purchase or the time when they started putting aside the money, whichever is lower. In the U.K., Share Incentive Plans allow employee purchases that can be matched directly by the company.
Stock options give employees the right to buy a number of shares at a price fixed at grant for a defined number of years into the future. Options, and all the plans listed below, can be given to any employee under whatever rules the company creates, with limited exceptions in various countries.
Restricted stock and its close relative restricted stock units give employees the right to acquire or receive shares, by gift or purchase, once certain restrictions, such as working a certain number of years or meeting a performance target, are met.
Phantom stock pays a future cash bonus equal to the value of a certain number of shares.
Stock appreciation rights
Stock appreciation rights provide the right to the increase in the value of a designated number of shares, usually paid in cash but occasionally settled in shares (this is called a “stock–settled” SAR).
Employee-owned corporations are majority employee-owned companies. This might arise through an employee-buyout. In the United Kingdom, it can be set up through an Employee Benefit Trust.
Worker cooperatives are very different from the above mechanisms. They require members to join. Each worker-member buys a membership interest at a fixed price, or buys a share. Only workers can be members, but cooperatives can hire non-worker owners. Each member gets one vote.
The Baltic states do not provide detailed rules on employee financial participation except for some supported schemes. However, comparisons across the national regulations on employee financial participation schemes showed little density. In other words, there were few laws related mostly to employee ownership plans and no special legislation on profit sharing. The Baltic states use the same type of employee ownership plans. In practice, several employee ownership plans are offered to employees or can be purchased from Lithuanian stock exchange markets, including action shares (in a public limited liability company), stock options and non-vested shares. The main problems are related to eligibility of stock options by employees. Another problem is related to the lack (Estonian case) of special legal schemes (the regulation for employee stock options or anotheran), legal loopholes (outdated regulation, restriction for initiations of stock option plans) or unspecified eligibility criteria for shares.
- National Center for Employee Ownership, Employee Ownership for Multinational Companies, 2010
- "ESOP (Employee Stock Ownership Plan) Facts". www.esop.org. National Center for Employee Ownership. Retrieved 2016-09-02.
- Whyte, W. F. and Whyte, K. K. (1991) Making Mondragon, New York: ILR Press/Itchaca.
- Erdal, D. (2008) Local Heroes: How Loch Fyne Oysters Embraced Employee Ownership and Business Success, London: Viking.
- Civinskas, R., Dvorak, J. (2017). New Social Cooperation Model in Service Oriented Economy: The Case of Employee Financial Participation in the Baltic States. Engineering Management in Production and Services, Vol. 9 (3), p. 37-50 https://www.degruyter.com/downloadpdf/j/emj.2017.9.issue-3/emj-2017-0024/emj-2017-0024.pdf
- Joseph Blasi, Douglas Kruse; Bernstein, Aaron (2003), In the company of owners: The Truth about Stock Options (and why Every Employee Should Have Them), New York, NY: Basic Books, ISBN 9780465007004, OCLC 50479205
- Rosen, Corey; Case, John; Staubus, Martin (2005), Equity: Why Employee Ownership is Good for Business, Boston, Mass.: Harvard Business School Press, ISBN 9781591393313, OCLC 57557579
- Curl, John (2009) For All The People: Uncovering the Hidden History of Cooperation, Cooperative Movements, and Communalism in America, PM Press, ISBN 978-1-60486-072-6
- Staubus, Martin (2011), "Creating a High-Performing Workplace", Employee Ownership Insights, The Beyster Institute (Summer 2011)