A Look at Employee Ownership with a Master of Business Administration Online
January 20, 2021
Have you ever thought about starting a business? One of the first steps is deciding whether or not you want your future company to be employee-owned. Grace College is here to take you through the ins and outs of employee ownership. If evaluating employee ownership interests you and you want to explore a more comprehensive study of business, the Master of Business Administration online is a perfect starting point for you!
There are roughly 6,600 employee stock ownership plans (ESOPs) covering over 14 million employees, according to the National Center for Employee Ownership (NCEO). An ESOP is a type of retirement plan that invests primarily in company stock and holds its assets in a trust. This is the main vehicle for broad-based ownership in the United States.
The following sections evaluate employee ownership and how to decide if it’s the right path for you.
What is Employee Ownership?
Employee ownership is the direct or indirect ownership of a company, in part or in whole, by some or all of its employees. While a business owner can also be an employee, employee ownership refers to ownership by a broad cross-section of employees through a formal plan offered by the employer. What are some ESOP pros and cons.
There are two main categories of employee ownership, according to the NCEO.
- ESOPs: Companies set up a trust fund for employees and then contribute cash to buy company stock, contribute shares directly to the plan or have the plan borrow money to buy shares. In the latter scenario, the company makes contributions to the plan to enable it to repay the loan. Contributions to the plan are tax-deductible, and employees pay no tax on the contributions until they receive the stock when they leave or retire. At that point, they sell it on the market or back to the company.
- Equity Compensation: This other category refers to a grant of stock or its equivalent from the employer. There are several types of equity compensation plans. Stock options give employees the right to buy company stock at a specific price and period. An employee stock purchase plan is similar, giving employees the chance to buy stock, typically through payroll deductions and at a discount. Restricted stock plans grant or sell employees stock once certain restrictions are met (such as vesting). Companies may also offer an unrestricted direct grant of shares.
There are other less common types of employee ownership plans. 401(k) plans can offer company stock as an investment alternative and/or as a company match, and they can be combined with an ESOP (sometimes called a “KSOP”). Worker cooperatives refer to enterprises solely owned and governed by their workers. A Master of Business Administration gives these co-owners insight about how to best leverage their share in the company.
Why Should my Company be Employee-Owned?
Let’s look at ESOP pros and cons. One of the most obvious advantages for ESOPs is tax incentives. ESOPs enable business owners to avoid or defer capital-gain taxes.
Perhaps the most impactful advantage for ESOPs is how they can enhance company culture. “Everyone wants informed, engaged, innovative employees, but the data show that all of those practices are especially effective in employee-owned companies,” according to Rodgers. “There’s a synergistic effect between employee-ownership and engagement.” Rodgers pointed to data showing how employee-owned companies have higher rates of sales growth, employment growth, and productivity, as well as lower turnover. “It just makes sense. When employees benefit from making the company stronger by owning shares, they have a reason to be better stewards of the company’s success.”
While ESOPs can be powerful in incentivizing employees and for gaining tax incentives, companies must be careful not to view them as a one-size-fits-all solution. ESOPs are not for all businesses.
An Example of Employee Ownership
Publix is the largest employee-owned company in the world. It has more than 225,000 workers and 1,251 store locations. The company has appeared on Fortune’s 100 best companies to work for list since it began in 1998. In 2019, it’s retail sales reached 38.1 billion and it is recorded as one of the country’s ten largest-volume supermarket chains.
One of the reasons for Publix’s high employee engagement and long-term success is its employee ownership plan, which was established in 1972. Employees who have worked for one year at the company and 1,000 or more hours are awarded stock valued at an average of 10 percent of their compensation. They receive annual allotments after that and have the option to purchase more shares.
In addition to regular reviews, frequent raises and a promote-from-within culture, Publix’s employee ownership plan has helped to create famous levels of employee and customer satisfaction.
Considerations for Starting an Employee-Owned Business
Entrepreneur presented four steps for starting a business that’s employee-owned. Once you graduate with your Master of Business Administration online, these will be key. You can decide with the ESOP pros and cons if it is the right step for you.
- Plan your exit. Considering what will happen five, 10 and 20 years down the line can prevent a great deal of stress on you and your company. Employee ownership offers a way for you to keep the company that you built independent and for your corporate mission to stay intact.
- Open the books. Corporate transparency helps. ESOP companies should start treating employees like owners before actually making them owners. Current employees can receive training on financial topics and access to sales and financial figures. Including employees on big corporate initiatives can also prepare them for ownership.
- Hire with future partners in mind. Rethink the hiring process. Employee-owned businesses are not merely hiring employees, but potential business partners. Find people who you can imagine sharing ownership in the company.
- Cultivate a culture of democracy. The most successful employee-owned businesses encourage staff to help make big decisions. It’s not only good for employee morale, but for the overall company.
Pursuing a Career in Business
Whatever your great business idea is — employee owned or not — getting your Master of Business Administration online will make a world of difference.
The Grace College Master of Business Administration degree is constructed and courses are delivered with an intentional applied emphasis. Consistent with learning-by-doing, course assignments allow students to use course concepts in their current employment setting. This allows students to quickly develop an initial proficiency with the concepts being covered. It also allows students to demonstrate to their employers the value-added nature of the program.