Employee ownership is a broad tool that can take different forms from business to business. Generally, the concept of a employee ownership is meant to give staff a stake in the company. That stake can look like cash, traditional stock, trusts, co-ops or, in the case of phantom stock (also known as phantom or ghost equity), can grant the right to the future value of shares, without distributing actual shares.
But why should business owners consider investing in an employee stock ownership plan in the first place? There are many reasons to grant employee equity – what they all have in common is being good for your business.
Aligned incentives
Sharing incentives with your staff is underrated but incredibly important. Imagine that you are incentivized to grow your customer base because more customers means growth, which means more revenue, which means more profit. Turning to an employee’s perspective: if your employee is going to be paid the same wage regardless of your company’s growth, then why would they care about whether or not you get more customers?
An employee ownership plan solves this problem. When your staff clearly benefits from the company’s wins, they are more likely to be proactive about finding business efficiencies, protect your bottom line, go the extra mile to serve a customer, and consider the future success of the business, since their financial rewards are tied to long-term company performance. Essentially, your employees are more likely to act like co-owners of your business. This shared sense of purpose and ownership between employer and employee helps foster joint motivation, collaboration, and success.
Increased productivity
Relatedly, improved employee productivity is a notable benefit of employee ownership. Research dating back to the 1970s shows that employee ownership drives up productivity and motivation. The most recent study comes from the UK, and shows an 8 – 12% productivity boost in employee owned businesses. This shouldn’t be surprising, as having a personal stake in something tends to generate more interest in care, which results in more focus geared toward that thing – in this case, growing a business.
Tapping into psychology
Have you ever thought about what truly drives you to get up every day and run your business? According to Self-Determination Theory, you likely have autonomy (being your own boss), competence (you’re good at what you do), and relatedness (a sense of belonging), which are the three ingredients for motivation. Employee ownership is a great way to share these principles – and therefore motivation – with your employees.
You can grant them autonomy by making them feel like an owner with a stake in your business; competence by encouraging them to develop their skills and sharpen them as long term employees; and relatedness by giving them a shared goal of growing the business.
Increased employee retention
When there is skin in the game, employees leave the company far less often. Companies with employee ownership structures in place across wholesale trade, manufacturing, and construction have turnover rates less than half of national averages for their industry. This indicates that employee-owners are more likely to feel a sense of loyalty and commitment to their employers.
On the flip side, the cost of employee turnover can be devastating to employers, and especially to small businesses. Employers can spend up to two times an employee’s annual salary in order to find and train a replacement for someone who has quit, which equals over $1 billion dollars every year. This is particularly costly for small businesses, as 66% of them experienced employee turnover last year. Nearly the same percentage of small businesses say that retaining employees is harder than hiring them.
Standing out as an employer
When it comes to benefits, it can be challenging for small businesses to keep up with what larger companies can offer employees.
Specifically when it comes to future-looking benefits like retirement plans, small businesses are worried about competing with larger companies. In fact, 73% of small business owners say they simply can’t compete with the benefits packages of larger employers. Nearly 40% of small business owners are worried about this in the context of employee retention.
Employee ownership, especially in the form of ESOPs (employee stock ownership plan), can be a more economical way for companies to provide retirement options for their employees. Even simpler forms of ownership like phantom stock options, while not a retirement plan, is a future promise for cash that can provide a similar incentive for employees. This makes employee equity a distinct way to stand out from a sea of competition, including larger employers.
Dedication to growth
Implementing an employee ownership program shows a belief in and commitment to company expansion. Employers who are willing to give their employees a personal investment in their business are serious about growing that business. The investment makes it clear that the owners want to bring on great employees and incentivize them to work hard, resulting in increasing the size of the pie. And who doesn’t want to be part of building a successful company?
Data shows the strong link between business growth and employee ownership. Companies with employee ownership grow faster and are less likely to go out of business than their counterparts.
Another form of growth not to be underestimated is the growth in positive sentiment when it comes to a business’ reputation. Communities value businesses that cultivate economic prosperity for their workers, who are members of those communities. That kind of moral support often translates into customer dollars spent.
An ideal exit strategy
For some of you, the idea of retiring might seem far away. For others, it’s just around the corner. Regardless, 80% of small business owners don’t have an exit plan for their businesses, which causes stress and financial hardship. Succession planning isn’t easy, but offering a form of employee ownership can make the process better in several ways by opening the door to a buyout.
Paving the way to a fully employee-owned company is a great way to bolster the stability of your business. Loyal employees who know the business inside and out will be the future of the company, all but guaranteeing continuity of your business ideals. Exiting to your employees is also a way to cement your legacy for years to come.
