Employee owned business
The A, B, C’s of Employee Owned Businesses.
Employee owned business are raising in popularity with some of the world's largest companies.
The premise of employee ownership plans (or ESOP) is the company’s workforce is provided with ownership interest in the company, most commonly through stock ownership. The more sophisticated companies participating often grant the ESOP fund with no upfront cost to the employee.
The idea, employee owned businesses, is pretty basic; building off of the believe that when a person is working for themselves the work produced is of better quality. Focusing that believe at a company level relates to, a business is more successful when the work is done within the business as opposed to be done by outsiders.
Employee stock ownership plan work like this: Employees are paid shares as part of work performed. The shares are then placed in an ESOP trust until the day comes that the employee retires or moves on to other ventures. In that event employee owned businesses either buy back the shares and redistribute them or void them entirely.
Make no mistake, employee ownership plans are formed in a way that prevents hostile takeovers and, more often than not, prevent the workers from acquiring too much of the company’s stock.
An ESOP fund presents a wide variety of advantages to employee owned businesses. Aligning lower compensation rates and freeing up company cash flow, all the while, increasing loyalty and reducing staff turnover is every company’s dream. All obtainable through employee ownership plans, with the added benefit of increasing employee job satisfaction.
The advantages for the employee or no less impressive. ESOP funds form a bond between employee engagement and employee involvement.This allows the opportunity for employees to have a substantial impact on decisions regarding products and business processes.
Just like everything else, employee owned businesses also have their downside; for both the workers and for the company itself.
Imagine you land a great position with an established ESOP fund. All the terms seem reasonable and you’re working toward, what appears to be, a great retirement plan. This is your first experience with employee owned businesses so you’re eager and dive right in. Over the years of service you receive more shares, however each share actually lowers your ownership percentage within the employee owned business. At some point you notice the share price has not increased for an extended period of time, which of course directly affects your retirement package.
The logical effects of that type of common scenario within employee owned businesses is a significant decrease in morale and retention. This is where employees may decide it’s better to cash in their shares by resigning. If only a handful of employees did just that, a shockwave of negative perceptions about employee owned plans, within the company, could trigger a domino effect of equal or greater reactions. That is one of the worst case scenarios on the business end of maintaining employee owned plans.
For the individual, the worse case scenario would be losing their entire investment, It’s easier than you would think. When an ESOP fund is not properly structured, it’s the employee that is taking all of the risk of employee owned businesses. If by some chance the company is assigned a court appointed administrator (aka: going into administration), The ESOP fund is lost and so is the employee's investment.
When done correctly, employee owned businesses can and do work well for both parties. The positives outweigh the negative by far. If you’re thinking about joining a company or the company you’re currently working for is discussing employee owner plans, make sure to ask the hard hitting questions.
Do you have experience with employee owned businesses? We’d love to hear them, comment and share!