More worker-owned businesses are sprouting

A growing number of employers are devising an innovative remedy for wage stagnation and income inequality: turning their workers into owners.

Last month, top  Greek yogurt maker Chobani cast a national spotlight on the trend by announcing that the company’s 2,000 full-time employees will receive shares worth up to 10% of the company’s value when it goes public or is sold.

Yet the two most prominent ways to give workers significant stakes — employee stock ownership plans (ESOPs) and worker cooperatives — go quite a bit further, handing as much 100% of a company to its employees.

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An ESOP, which is far more common, sets up a retirement trust for all full-time employees and contributes shares annually. On average, the trusts are granted 30% to 50% ownership, but four in 10 ESOPs own, or eventually will, 100% of the companies, according to the National Center for Employee Ownership (NCEO).

Although employees must wait until retirement age to draw the funds, ESOPs create far more wealth than 401(k) plans, with participants accumulating about three times the assets of employees in comparable companies, NCEO says. Plus, many companies with ESOPs also provide 401(k)s. This month, Paper Machinery of Milwaukee turned over the 65-year-old company to its 250 employees through an ESOP.

In the 2014 tax-filing year, the most recent available, about 6,300 ESOP plans covered about 14 million U.S. employees, up from 13 million in 2009, according to Labor Department figures compiled by NCEO. Loren Rodgers, NCEO's executive director, believes 2015 saw a significant pickup in ESOP formation, citing anecdotal evidence such as a 20% increase in attendance at the group’s annual conference.

Largely driving the ESOP movement are the thousands of baby-boomer owners of private companies who are nearing retirement age and seeking a succession plan if their kids aren’t interested in taking over the company.

“Taking your private stake to the coffin ain’t going to do you any good,” says Michael Keeling, president of the ESOP Association. “You can sell to a competitor, sell to private equity, go public or liquidate and sell the hard assets.”

Transferring ownership to employees through an ESOP can preserve the company’s culture, ensure it stays in the community, avoid layoffs and reward and incentivize employees, all while allowing owners to cash out, ESOP industry officials say. (Technically, the ESOP trust purchases shares through a loan that is secured and repaid by the company, though that cost is partly offset by tax benefits.)

Also motivating retiring owners is growing public angst about a wealth gap that has delivered outsized benefits to high earners and widened after the 2008 financial crisis, according to sociologist Sanjay Pinto, author of a recent report on worker-owned businesses for the Surdna Foundation.

And there are substantial tax advantages. Depending on how it’s incorporated a company can defer capital gains taxes, or avoid all income taxes if it’s 100% ESOP-owned, and deduct both principal and interest on the ESOP loan.

In summer 2014, Boston-based Harpoon Brewery formed an ESOP that owns 48% of the company, allowing co-founder Rich Doyle, 56, to cash out. The company, with 186 full-time employees, plans to shift to 100% ESOP ownership when co-founder Dan Kenary, 55, steps down.

“I really value independence, and I’m not driven to maximizing the dollars,” Kenary says.  “I was excited about the opportunity to share this with our employees. And with all this talk about income inequality…. there has been way too much greed in our society.”

Aaron Moberger, 29, a Harpoon manager, says the ESOP offers the “potential to generate wealth and have a comfortable retirement but there’s no guarantee — it’s up to us” to grow the profits. “I think people (now) may take things into their hands a little more. You sort of look at things with a more detailed eye and think, ‘How can we tease the most efficiency out of this process?’ ”

Companies on average grow sales, employment and productivity 2% to 3% faster each year after creating ESOPs, according to studies cited by NCEO.

Looming retirement isn’t the only driver. Eureka Casino Resort, of Mesquite, Nev., converted to a 100%-owned ESOP last fall to ensure it retains its leadership team and can attract employees to a small town vulnerable to heavy resident outflows, says CEO Greg Lee, who owns the resort with his family and has no plans to step down.

Unlike ESOPs, worker cooperatives are typically employee-owned from the outset, created by workers or their advocacy groups. The U.S. has only about 350 worker cooperatives that employ about 5,000, but they’ve posted double-digit annual growth since 2010, estimates Amy Johnson co-executive director of the U.S. Federation of Worker Cooperatives.

Some employees laid off in the 2007 to 2009 recession formed cooperatives, and others have been emboldened by stagnant wages since, Johnson says. The movement, she says, has caught fire in low-wage sectors such as housecleaning and home healthcare, as well as fields such as solar panel installation, retail food and website design. Workers typically make an initial investment of a few hundred or few thousand dollars and receive an annual distribution of profits. They also typically have a voice in company decision-making directly or by voting for a board of directors.

“When you’ve been exploited, you know it,” Johnson says. “It gets frustrating” and workers figure, 'We’re running everything. Why not start our own firm?' ”