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Employee Ownership: A Business Strategy for Growth

Employee Ownership: A Business Strategy for Growth. Ron Bernstein Beyster Institute. What is Employee Ownership?. Ownership by employees of shares of stock of their own company Can exist in both publicly traded and private companies

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Employee Ownership: A Business Strategy for Growth

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  1. Employee Ownership:A Business Strategy for Growth Ron Bernstein Beyster Institute

  2. What is Employee Ownership? • Ownership by employees of shares of stock of their own company • Can exist in both publicly traded and private companies • Includes both direct individual ownership and trust fund ownership with individual employee accounts within the trust • Includes a broad range of employees MEET U.S.

  3. What Employee Ownership Is NOT • NOT a worker cooperative or collective ownership scheme • NOT necessarily total or even majority ownership by employees • NOT just ownership by top management • NOT a partnership • NOT “workplace democracy” or similar egalitarian system MEET U.S.

  4. Why Do Companies Implement Employee Ownership Plans? • Because it’s fair (values-based approach) • To incentivize performance, productivity and growth (enlightened self interest) • As part of strategic planning (divestitures, business succession, benefits redesign) • In response to market demands (competitive pressures and employee expectations) • To save the company (buyouts, job preservation, privatizations) MEET U.S.

  5. Statistics on Employee Ownership in the U.S. • Approximately 17,000 broad-based employee ownership plans in U.S. • Value of EO Plans tops $700 Billion or about 9% of market capitalization • 90% of VALUE of EO plans in public companies but 90% of NUMBER of plans in private companies • 1/3 of EO in ESOPs, 1/3 in other qualified plans and 1/3 in purchase/bonus/options-- 401(k) and options fastest growing MEET U.S.

  6. Statistics on Employee Ownership in the U.S. (cont.) • EO typically 20-40% in private company and 5-15% in public company • Employees own a majority stake in 1,500 companies, mostly private • 1,000 public companies with at least 5% EO, with average of 12% • 25% of Fortune 500 at least 12% employee-owned • Many multi-nationals establishing international stock plans MEET U.S.

  7. Many Types of Employee Ownership Plans • Each Plan Meets Different Objectives-- Stock Purchase Plans-- Stock Bonus Plans-- Stock Options-- Qualified Retirement Plans-- Employee Stock Ownership Plans (ESOPs)-- Simulated Equity Plans MEET U.S.

  8. Stock Option Plans • Allows employees to share in the future growth of the company’s value • Upside opportunity with minimal downside risk for employees Definition: The right to purchase company stock in the future at a price that is fixed at the date of grant MEET U.S.

  9. Exercise Sale Stock Option Example Stock Price Grant YEARS MEET U.S.

  10. Employee Stock Ownership Plans (ESOPs) • Qualified employee benefit plan primarily invested in company stock • May borrow money to purchase block of company stock in a single transaction • Many special ESOP tax incentives MEET U.S.

  11. Typical Uses of ESOPs • Provide broad-based ownership to employees • Buy out departing owner(s) on tax-advantaged terms • Raise working capital MEET U.S.

  12. Leveraged ESOP Loan Payments Loan Proceeds Lender (Bank) XYZ Corporation Loan Payments Mirror Loan Annual Contributions ESOP Trust (must own 30%) Selling Shareholders Loan Proceeds Shares Stock Proceeds QRP Shares Market Employee Accounts MEET U.S.

  13. Countries That Have Utilized Employee Ownership • Britain  Argentina  China • Bulgaria  Chile  Ghana • France  Columbia  Pakistan • Hungary  Costa Rica  Philippines • Latvia  Jamaica  Russia • Lithuania  Mexico  South Korea • Poland  Venezuela  Sri Lanka • Romania  Egypt  Turkey • Slovenia  Zimbabwe  Ukraine MEET U.S.

  14. Best Practices of Employee Ownership Companies • Consistent support by corporate leadership-- Without commitment and involvement from the top the plan lacks credibility • Provide sufficient opportunities for “meaningful” levels of stock ownership-- Focus on economic value to the individual • Ownership rewards for key employees based on meeting performance measures-- Combine stock incentives with strategic goals MEET U.S.

  15. Best Practices of Employee Ownership Companies • Provide some ownership for all employees -- Tie to performance as much as possible • Get all employees to think and act like owners through active participation program-- Goal is psychological ownership of their job • Employee involvement in decision-making -- Balance of rights and responsibilities • Communicate, communicate, communicate-- Open-book management MEET U.S.

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