Employee Ownership:
Definition, Types, Benefits & Comparison

Employee ownership is an arrangement in which a company's employees own shares in their company or the right to the value of shares in their company. It represents a broad concept that can take many different forms, ranging from simple grants of shares to highly structured plans, enabling workers across a company to have a financial stake in the business.

Employee ownership means different things to different people, and there are different ways to implement it. Rather than ownership by individual business founders or executives, employee ownership refers to ownership by a broad cross-section of employees, including rank-and-file employees, generally through a formal plan offered by the employer.

Related terms: Employee Stock Ownership Plan (ESOP), worker cooperative, equity compensation, employee ownership trust

There are 3 main types of broad-based employee ownership, all of which have been around for many decades:

• Employee Stock Ownership Plans (ESOPs)
• Worker cooperatives
• Employee Ownership Trusts (EOTs)

The most common structure for broad-based employee ownership in the United States is the employee stock ownership plan (ESOP). As of the most recent data, 6,358 ESOP companies exist, covering 14.9 million employees. An ESOP is a type of retirement plan, similar to a 401(k) plan, that invests primarily in company stock and holds its assets in a trust for employees.

Worker cooperatives are enterprises solely owned and democratically governed by their workers. Generally, employees join the cooperative by paying a fee, and each worker gets one vote. They are most common in startups, small companies, and companies with social missions, although they are possible at companies with thousands of workers.

Employee ownership trusts (EOTs), although relatively new in the United States, are the primary form of employee ownership in the United Kingdom. EOTs are generally purpose trusts that own some or all of the shares of a company. The trusts typically have governance documents that protect the character of the company and the interests of employees. Employees typically benefit financially through annual profit sharing.

Other forms of employee ownership include equity compensation plans such as stock options, employee stock purchase plans (ESPPs), restricted stock, phantom stock, and stock appreciation rights (SARs). A number of companies also offer stock bonus plans or profit-sharing plans that invest in company stock.

Over 14 million United States employees participate in ESOPs, about 9 million hold shares or share rights (such as stock options) they have been granted, and perhaps 11 million participate in stock purchase plans. Worker cooperatives and employee ownership trusts cover, collectively, about 20,000 employees.

Researchers at Rutgers estimated in 2024 using 2021 data that 11 million employees participated in equity compensation plans such as stock options and stock purchase plans. There is some overlap, so there may be approximately 25 million employees in the United States (out of a private, nongovernmental, workforce of 135 million or so as of 2026) participating in broad-based employee ownership programs at thousands of corporations both large and small.

Before the 1970s, relatively few United States workers were co-owners of the companies where they worked. However, tens of millions of Americans now participate in the stock plans discussed above.

The main benefit of employee ownership is that it gives employees the ability to benefit from the success of the company, often in the form of the value of company stock. Employee ownership has great potential to stabilize employment, to root productive capital in communities, and to increase the assets and incomes of working families.

Research comparing young employee-owners with non-owner counterparts found that employee ownership made a real difference in their lives. The employee-owners had 33% higher median income, 92% higher median household net wealth, and 53% more job stability when compared with non-owner peers. ESOP participants have more than twice the average retirement savings of non-employee owners ($170,000 vs. $80,000) and more than double the average net worth of non-employee owners ($577,000 vs. $246,000).

A 2017 NCEO study found being in an ESOP was associated with 92% higher median household net wealth, 33% higher median income from wages, and 53% longer median job tenure. There is extensive research showing that employee ownership tends to substantially improve corporate performance and employee financial well-being.

Other companies use employee ownership for reasons such as attracting and retaining employees, providing them long-term wealth building, and supporting a high-involvement work culture where employees are given the opportunity to think and act like owners.

The most common reason companies become employee-owned is that the current owner wants to exit their ownership position and does not want to leave the business in the hands of private equity, a public company, or another outsider. In many cases, the most effective path is through an ESOP, but other forms of employee ownership can protect the character and legacy of the owner's business as well.

When a business owner retires, an ESOP ensures their business will persist, without the owner having to look for outside buyers or consider closing their doors. When a business owner establishes an ESOP, the shares are held in a trust, which enables the employees to build wealth, and it keeps the business going if the owner retires.

Business owners have many reasons to be proud and many reasons to consider employee ownership. Not only do owners ensure a fair price can be negotiated for their business, but the process can be strategized to meet each individual's needs.

An ESOP is a type of retirement plan, similar to a 401(k) plan, that invests primarily in company stock and holds its assets in a trust for employees. An ESOP may own 100% of a company's stock, or it may own only a small percentage. ESOP participants (employees) accrue shares in the plan over time and are paid out by having their shares bought back, typically after they leave the company.

ESOPs are often created in the process of selling a business, as an ESOP can buy a departing owner's shares in pretax dollars on terms that are favorable to the owner, the employees, and the business itself. Selling owners can sell any portion of their stock to the ESOP, and they can defer tax on the gain from the sale if certain requirements are met.

Congress created incentives for ESOPs to borrow money (leveraged ESOPs), allowing them to purchase more shares than they otherwise would be able to. Nonleveraged ESOP transactions tend to be smaller and have lower transaction costs. Companies also can use ESOPs simply as a way to reward and engage employees even if there is not a selling owner.

As tax-advantaged employee benefit plans, ESOPs are subject to many rules in the Internal Revenue Code and the Employee Retirement Income Security Act (ERISA) designed to protect participants and are regulated by the IRS and Department of Labor. Over 6,400 companies have an ESOP, covering more than 15 million people (including both current employees and ex-employees still receiving payouts).

Worker cooperatives are enterprises solely owned and democratically governed by their workers. Generally, employees join the cooperative by paying a fee, and each worker gets one vote. They are most common in startups, small companies, and companies with social missions, although they are possible at companies with thousands of workers.

An employee pays a membership fee to buy a single share in the co-op and become a member, and each member has one vote. Not all employees may be members. Most cooperatives are small companies with less than 50 employees, and the total number of employee-members in United States co-ops has been estimated at 7,000.

Employee ownership trusts (EOTs) are generally purpose trusts that own some or all of the shares of a company. The trusts typically have governance documents that protect the character of the company and the interests of employees. Employees typically benefit financially through annual profit sharing.

An EOT is a permanent trust that the company creates to buy shares from the owner(s). The EOT holds the shares and never distributes them or their cash value to departing employees, unlike an ESOP. Instead, employees are the beneficiaries of the trust and generally receive a share of the profits.

Although relatively new in the United States, employee ownership trusts are the primary form of employee ownership in the United Kingdom. The most notable EOT company is the 80,000-employee John Lewis Partnership in the UK. EOTs in the United States do not have the tax advantages or extensive legal rules that ESOPs do; on the other hand, they are comparatively inexpensive to create.

Equity compensation refers to a grant of stock or its equivalent from the employer. It is fundamentally different than plans such as ESOPs because equity compensation grants are incentive grants, not retirement plans, and the object is not long-term ownership but rather the opportunity to cash in on the stock price, especially on the public markets.

There are several types of equity compensation:

• Stock options grant employees the right to buy company stock at a specified price during a specified period once the option has vested
• Employee stock purchase plans (ESPPs) give employees the chance to buy stock, usually through payroll deductions, and most often at a discount
• Restricted stock plans grant or sell employees stock that they can possess only once certain restrictions (such as vesting) are met
• Phantom stock plans provide a cash bonus based on the company stock's value; there is no actual grant of shares
• Stock appreciation rights (SARs) are similar to phantom stock but pay only the increase in value of the hypothetical stock grant

Except for ESPPs, which must be offered to most employees, equity compensation can be granted to as few people as desired. Thus, equity compensation can be broad-based but is not inherently broad-based.

Some situations have common solutions. For example, if you are a business owner who wants to sell the company in a tax-advantaged fashion, you usually should consider an ESOP. Other situations are not so cut-and-dried. It is common for companies to have more than one stock plan.

Each employee ownership model has key characteristics. ESOP companies typically have 40 or more employees and $750,000 or more in EBITDA, offer tax benefits to selling owners through the 1042 deferral of gains, provide S Corporation tax avoidance benefits to the employee-owned business, but have high setup and ongoing costs. Worker cooperatives can be any size, offer tax benefits to selling owners, provide tax deductions for patronage, have low setup costs, and require employees to buy their shares with direct employee role in strategic decision-making and built-in profit-sharing. Employee ownership trusts can be any size, offer no specific tax benefits to selling owners, provide tax deductions for profit-sharing, have low setup costs, are highly flexible, do not require employees to buy shares, and allow optional employee role in strategic decision-making.

Employee ownership is a proven tool for creating jobs and spurring economic activity. S corporation ESOPs generate a collective $19 billion in economic value that would otherwise not exist. S corporation ESOPs produce significant macroeconomic impacts including jobs, income, output, and tax revenue.

S corporation ESOPs employ workers and make purchases from various types of suppliers. These suppliers in turn hire workers and buy from their own suppliers, and so on. In addition, S ESOP employees as well as the suppliers' employees spend their disposable income in various ways, benefiting other businesses and in turn supporting other jobs.

S corporation ESOPs initiated $27 billion in tax revenue in 2010 ($11 billion for state and local governments and $16 billion for the federal government) and created or supported $246 billion in output. These findings show that ESOPs are vital economic players in the United States.

Employee ownership generally improves company performance by aligning incentives between staff and leadership, leading to greater productivity and innovation. ESOP firms often outperform their competitors. There is extensive research on employee ownership and corporate performance showing that employee ownership tends to substantially improve corporate performance and employee financial well-being.

A 2024 study that looked at Contractor Performance Assessment Rating System (CPARS) scores found that federal officials rate firms entirely owned by ESOPs higher than all other firms. This same study found that survival rates of 100 percent ESOP firms show these companies are more resistant to consolidation.

Nearly 80 percent of leaders at S corporation ESOPs believe employee ownership helps them manage economic disruptions. ESOP leaders reported that the voluntary quit rates of their employees were nearly one-third the national average.

Employees must have a say in how the business is run for true employee ownership. Different ways of engaging employees are suitable for different businesses, but can include an employees' council or other consultation group, a constitution defining the company's values and its relationship with employees, employee directors on the board with the same responsibilities as other directors, and working with trade unions on issues like pay and conditions.

Employee-owned companies perform better and offer more fulfilling careers when they treat their employee-owners as true owners and involve them in analyzing finances and determining how their jobs are done. Companies that use employee ownership often support a high-involvement work culture where employees are given the opportunity to think and act like owners.

ESOPs sustain local jobs because employee-owned companies are less likely to relocate outside of their communities. This stability, in turn, keeps wealth circulating in local areas. When a business owner retires, an ESOP ensures their business will persist, without the owner having to look for outside buyers or consider closing their doors.

While no business is entirely immune to external factors, ESOPs tend to be more resilient. Employee ownership has great potential to stabilize employment, to root productive capital in communities, and to increase the assets and incomes of working families.

Employee ownership is often compared to 3 related concepts:

Employee Ownership vs. Traditional Retirement Plans (401k)

Employee Ownership vs. Executive Stock Options

Employee Ownership vs. Profit Sharing