What is an employee-owned company?
What does “employee owned” mean? Well, the National Center for Employee Ownership (NCEO) official definition goes like this:
“Employee ownership is a term for any arrangement in which a company’s employees own shares in the company’s stock.”
Workers gain ownership interest in the company, so they benefit directly from company growth. One very obvious side effect of employee ownership is employee satisfaction—which is what you see on full display when you visit a Publix supermarket.
How do employee-owned companies work?
As implied by that one-sentence summary above, employee ownership is a complex subject. Quite a few different forms of employee ownership exist, including:
Employee stock ownership plans (ESOPs)
Let’s begin with the most popular type of employee ownership scheme in America. In basic terms, ESOPs are trust funds or retirement plans because they give the sponsoring company, the selling shareholders and participating employees specific tax perks.
Some ESOPs own a large proportion of company stock, while others own companies outright. About 14 million U.S. workers are ESOP participants. A slim majority of ESOPs are held in S Corporations, while the remainder are held in C Corporations.
Equity compensation plans
Equity compensation is the second biggest form of employee ownership in the U.S. Employees get stock—or stock equivalent—grants from their employers. Seven main types of equity compensation plan exist:
- Direct grants
- Employee stock purchase plans (ESPPs)
- Performance shares
- Phantom stock
- Restricted stock
- Stock appreciation rights
- Stock options
Each type of equity compensation plan has a different structure, a distinctive set of rules and a particular group of incentives.
Worker cooperatives
Worker cooperatives are fairly uncommon in America, but they’re a legitimate form of employee-owned business. In 2017, there were just under 400 worker-owned cooperatives in the U.S. Simply put, workers own the cooperatives they’re employed by lock, stock and barrel—and they, rather than a group of traditional shareholders, get to make all the decisions.
Employee-owned company benefits
There are lots of benefits to employee ownership—both for the company and for the employees themselves. These include:
- Increased employee engagement: Employees feel empowered, so they readily participate in decision making.
- Better productivity: Participants feel a sense of ownership over the company, so they work harder to achieve success.
- Bigger profits: Increased employee motivation generally leads to a bigger profit at the end of each quarter.
- Tax benefits: ESOP contributions are tax deductible—up to 25% of total payroll, in fact. Business can also deduct some ESOP-held dividends, reducing tax liability even further.
- Retirement savings: ESOPs work a lot like 401(k) plans, so employees can defer tax contributions until they begin to receive distributions after retirement.
To recap, employees gain a personal stake in the success of the company, so they stay engaged and work more efficiently. In turn, company profits improve.
Examples of employee-owned companies
In total, there are well over 7,000 employee-owned companies in the U.S.—far too many to explore in a single blog post. We’ll have to make do with the following three examples: Publix, WinCo Foods and Penmac Staffing.
Publix Super Markets
Founded in 1930 by George W Jenkins, Publix Super Markets is the Big Daddy of U.S. employee ownership. The company has just over 1,200 mainland U.S. stores and it employs about 200,000 people, making it far larger than the next biggest American employee-owned company.
Once they’ve been with the company for 12 months, all Publix employees receive company stock. Remember the Fortune 100 Best Companies to Work For list we mentioned earlier? Publix holds the number 38 spot in the 2020 lineup.
WinCo Foods
The first WinCo Foods store opened in 1967 in Boise, Idaho. Originally named Waremart and based on a warehouse-style grocery store format (think Costco, only smaller), WinCo foods soon grew into the Pacific Northwest’s low-price leader. Today, the company has 127 employee-owned stores—and it has over 20,000 people on its payroll.
Workers get a stake in WinCo’s ESOP after 500 hours on the job, and to keep it, they have to work at least 1,000 hours a year (about 20 hours a week). WinCo ESOP contributions come from the company, rather than from employees.
Penmac Staffing
Penmac Staffing opened its first branch in 1988 in Springfield, Missouri. Its founder, Patti Penny, started the company to find temporary employees for her husband’s employer—but her venture soon grew. Penmac expanded rapidly, going from one branch in a single state to multiple branches in eight states. In 2020, Penmac had 32 stores in various locations across the United States.
Employee owned since 2010, Penmac has an ESOP, and all long-term full-time staff are enrolled automatically. Similar to WinCo, Penmac staff have to work at least 1,000 hours a year to stay enrolled.
Employee-owned company FAQs
Employee ownership is a complex topic. This FAQ section should tie up a few loose ends.
What is the largest employee-owned company?
The largest employee-owned company in the U.S. is Publix Super Markets. In 2019, Publix retail sales totaled 38.1 billion with a net profit of $3 billion.
What does it mean when a company is 100% employee owned?
Some employee-owned companies are only partly employee owned. Where companies are 100% employee owned, workers own the entire company. Employees hold all the shares, and they’re responsible for all the decisions.
What is the minimum percentage of a company that an ESOP is required to own?
To qualify for C-Corp tax referral under 1042 rules, ESOPs must own a minimum of 30% of a company. Some ESOPS own less than this—sometimes as little as 10% of a business—but they tend to be S-Corps rather than C-Corps.
Employee-owned companies: a final summary
ESOPs, which work like trust funds, represent just one form of employee ownership; worker cooperatives and equity compensation plans also fall into the EO category. Benefits of employee ownership include increased worker motivation, higher productivity and increased profits—in other words, everyone’s happy.
