Definition: Employee ownership is a model in which the employees owns all or maximum stake in the business. It isn’t restricted to the higher level but offered to every management level. It also provides tax benefits to businesses.
This model benefits both the business as well as employees. Employees shares companies profits, which boost enthusiasm. It results in increased productivity and growth of the company.
The business which practice employee ownership is known as Employee Owned Organizations. The widely used model of employee ownership is Employee Stock Ownership Plan (ESOP) which will be discussed in detail further in this article.
Employee participation in decision making, better incentives and ownership experience leads them to focus on the quality of work and dedicated efforts towards the customer.
Content: Employee Ownership
- Factors Driving
- Theory of Ownership
Forms of Employee Ownership
It is the most common form of ownership that businesses practice. The stock of the company is open for all. Any individual from society or community, including employees, can hold stock in the company.
It is a form of employee-ownership in which every individual working in the business is an owner or the exclusive owner. In other words, the company is owned and managed by its employees.
The workers own the companies shares and appoint the board of directors among themselves. The crucial decision making in the organization is taken by the workers jointly.
It is an autonomous business model where the employees get actual holding in the business. It involves a relatively low set-up cost. The companies gains and losses directly affect the workers, so they strive to work most desirably.
Employee Stock Ownership Plans(ESOPS)
It is an indirect form of ownership in which employees get partial or complete ownership due to the employee-ownership trust. The company creates this trust on behalf of its employees.
This form of ownership is a part of the employee benefit plan. It involves high set-up costs, and the owner enjoys full control over the business.
- The employer can sell some or all of their business to the employees.
- The employee doesn’t have to pay anything for the purchase of stock.
- The companies borrow money from financial institutions for the same.
- The institution pays the fair market value for its stocks.
The borrowing taken by the company results in tax benefits to the businesses. The employee owns the stock until he retires or leaves the organization. It is also the best retirement scheme that companies can offer to their employees.
Factors Driving Employee Ownership
- Save Struggling Organizations: The organizations at their declining stage can bounce back through ownership models.
- Resist Involuntary Takeovers: By giving a stake to employees, the business can resist the forced takeover. It also increases overall productivity within the organization.
- Capital Generation: The companies can generate funds by providing stakes to the employees.
- Tax Benefits: The companies can enjoy tax benefits by applying Employee Stock Ownership Plans. The employees can also enjoy tax-free bonuses.
- Rewards and Incentives: Employees receive incentives, bonuses and share in companies profits.
- Employee Recruitment and Retention: The companies can retain their employees as they are also the stakeholders.
- Disputes Settlement: Companies often go for Employee Stock Ownership Plans(ESOPS) for dispute settlement with labours leading to firm failure.
- Loyalty: The employees of employee-owned companies are loyal. They also own a part of the business, so they work with more dedication and commitment and try to achieve more profits.
Merits of Employee Ownership
The employee-owned business has several advantages over the conventional business model. The merits of employee ownership within and outside the organization are as follows:
Internal Business Environment/ Within the Organization
- Lower Turnover Ratios: The employee-owned companies often show a lower turnover ratio as the employees are more engaged and loyal towards the organization.
- Goodwill: The companies can create their worth in the market through this model. Every business element works together towards the common goal and takes it to new heights.
- Employee Commitment: The organizations’ profits and losses are shared with the employees too, so they work with more commitment and dedication.
- Profit Maximization: The company maximizes its profits by applying this model as the company receives tax relief and enhanced workforce productivity.
- Job Security: At the time of lay-offs, the employees who hold shares are secured. By becoming an essential part of the companies ownership, the employees get job security in the long run.
- Improved Adaptability: The companies with shared ownership are more adaptive to economic changes.
- Motivated Workforce: The monetary and non-monetary benefits gained through employee ownership is an excellent source of motivation for the organization.
External Business Environment/ Outside the Organization
- Economic Growth: The applicability of shared ownership in businesses results in overall economic growth. To encourage enterprises, the government provides tax benefits.
- Reliable Business Model: It is a reliable business model as many companies practice this model locally and globally, generating satisfactory results.
- Firm Survival: The firm with employee-owners can survive in economic downturns longer in the dynamic business environment.
- Social Responsibility: The concept of employee ownership develops influential community and social responsibility.
Demerits of Employee ownership
Following are the demerits or disadvantages of employee ownership:
- Employees can feel stressed.
- The companies can generate more capital through trading in financial markets.
- The employee may feel pressured as they are also part of the crucial decision-making process.
- Along with the profits, employees has to bear the companies losses if it doesn’t perform well.
- Employees may not leave the organization easily.
Theory of Ownership
Theory of ownership implies that the stake in the company’s ownership affects employees positively. It stimulates various factors like job satisfaction, motivation, reduced personnel turnover, etc., within the organization.
The right in the company’s decision making and information about critical issues leads to the development of psychological ownership in the employees. Psychological ownership promotes enhanced employee performance, behaviour and increased commitment.
Example of Employee Owned Organization
The two employee-owned organizations are listed below:
- Parsons Corporation is an American company founded by Ralph M. Parsons in 1944, headquartered in Centreville at Virginia. It provides solutions digitally for defence, intelligence and infrastructure. Parsons uses ESOP as a retirement plan for its employees and offers Employee Stock Purchase Plan(ESPP) as additional financial security.
- Houchens Industries is a 100% employee-owned company listed by Forbes based in Bowling Green, Kentucky. It is a private American company belonging to the Grocery store and Insurance Industry. It was founded as Houchens Foods by Ervin G. Houchens in Glasgow, Kentucky.
Employee ownership is a concept in which the employee becomes the company owner by holding a full or partial stake in the company.
There are different ways of implementing employee ownership in the organization. Companies can select the form of ownership according to profitability and degree of control.