By Rachel Merfalen, Director of Business Services
Have you heard of employee ownership? Recently, El Cajon-based Taylor Guitars announced its transition to a wholly employee-owned company, benefitting not just San Diego employees but those who work in the Tecate-based factory in Mexico.
Broad based employee ownership differs from stock-option models in that it gives all employees who meet basic criteria the opportunity to become employee-owners.
People love the idea of working at employee-owned companies—72% of workers say they prefer it—and customers love to support them—about 40% say they are more likely to buy from a company that shares ownership with its employees.1
I’m an example of a worker who left my job to pursue business ownership and the benefits it had to offer—albeit through the difficult journey of entrepreneurship. As I began to experience the benefits of business ownership, I also realized that the path I chose is not for everyone—it requires a great deal of risk and sacrifice. I became fascinated with corporate social responsibility and the critical role that employers play in creating opportunity and quality work experiences for their employees.
One of the reasons I’m back at work with the San Diego Workforce Partnership is because I believe that companies play an essential role in providing San Diegans with opportunities that enable them to prosper. One of my dreams is that my family, my friends and my neighbors find those pathways to vocational fulfillment: without having to quit their jobs. Employee ownership is one tool to make that happen.
Employee Ownership is Good for Businesses
San Diego has some incredible examples of employee ownership success stories but business owners might wonder, “Good for them, but would it work for me?” The great news is the business case for employee ownership is strong. Employee ownership not only makes for resilient, competitive companies that customers love, but it also has transformative effects on workers and compounding benefits for their families, communities and the local economy.
For the right business, employee ownership comes with tremendous tax benefits. In fact, a 100% employee-owned S-corp pays no income taxes. Set-up costs and the sale of the business to employee owners are tax deductions. The selling shareholders are eligible for capital gains deferral, maintain access to their proceeds tax free, and can gift the remaining value to their heirs on a stepped-up basis.
Employee-owned companies enjoy higher growth, productivity and profitability. Following conversion, companies experience an increase of two percentage points in sales, employment and productivity growth.2 The Democracy at Work Institute found that worker cooperatives across all industries had an average profit margin that was almost 8.5% higher than the average private firm.3 Employee-owned companies also demonstrate higher than average employment growth, faster post-recession growth and reduced turnover rates.4
Ownership also seems to shape employee’s actions and perceptions related to participation, inclusion, value, trust, equity and fairness. Companies benefit from enhanced worker loyalty that translates into more productivity, innovative ideation and a more collaborative company culture (Kruse, Freeman & Blasi 2010).
During the recent pandemic, employee-owned companies showed greater resilience, significantly out-performing their non-employee-owned counterparts in retaining employees, protecting worker health and safety, and maintaining hours, salaries and wages. Employee-owned companies were 3.2 times more likely to retain staff, even when they did not receive support through the Paycheck Protection Program and their privately-owned counterparts did.5
Finally, it’s worth noting that a recent poll of San Diego business owners found that nearly nine out of ten had no formal plan to transition from the current owner, with two thirds having no plan at all. Worse, only 20-30% of businesses that go on the market are actually sold.6 Employees represent a qualified buyer that will purchase the business at fair market value based on a fair, third-party assessment.
Employee Ownership is Good for Workers
For workers, employee ownership creates real economic stability. Employee-owners experience financial advantages on four levels:
- Equal or better pay and benefits
- Asset building through profit sharing, retirement savings and shared business ownership
- Enhanced job security and stability
- Well-being and psychological safety
Employee-owners have better job quality outcomes, including training, participation in company decision making and increased access to benefits like paid leave, tuition reimbursement and employer-sponsored childcare.
The case for employee ownership is strengthened by the impact this powerful business model has in addressing economic instability and wealth inequality with low- and middle-wage workers. Prior to the pandemic, as workers lived paycheck-to-paycheck and navigated the challenges of housing, education and childcare costs, 46% of families in the U.S. could not manage a $400 emergency expense. The impacts of the COVID-19 pandemic have only exacerbated this stark economic reality, most of all for workers of color and women who have been disproportionately impacted.
Employee ownership helps to close the race and gender wage gap. Employee owners of color have 30% higher income and women employee owners have 17% higher income than do their non-employee owner counterparts, a number that jumps to 24% for single women. Employee ownership enables workers to build wealth by sharing in the profits generated by their work. Employee-owners on average have retirement accounts that are more than twice the size of those at non-ESOP companies. In a 2019 study by the Kellogg Foundation, long-time low to moderate-income employee owners had 401(k) accounts that were 12x the size of the median retirement savings for the average worker.
Employee Ownerships is Good for San Diego
At the San Diego Workforce Partnership, we believe employee ownership should be a topic of conversation among San Diego business owners, workers, philanthropists and government as we work together on an inclusive and equitable recovery.
Our region is facing a compounded economic and opportunity crisis: small businesses have been disproportionately devastated by pandemic impacts, and the “silver tsunami” of retiring baby boomers leaves many businesses without succession plans. Ten thousand baby boomers are retiring every day across the nation, and millions of them own businesses that employ nearly 1 in 6 workers in the United States. To retain these businesses and the jobs within them, employee ownership is a critical tool to be leveraged to prevent a loss of economic opportunity for our region, and especially for the workers, families and communities that are the backbone of our small business-based economy.
We are committed to supporting employee ownership in our region, including providing financing and technical support to companies interested in putting an employee-owned succession plan in place. If you are a business owner contemplating retirement, consider the words of Bob Taylor, founder of Taylor Guitars.
“You’ll sell your business one day: either when you’re alive on purpose or upon your death, perhaps by accident. So planning for it is smart.”
Taylor chose to sell his business to his employees to ensure the Taylor Guitars legacy would be cared for and curated by those who know it best: the people who built the business with him.
Interested in exploring the benefits and how-tos of employee ownership? Join us on June 17 for Keep San Diego Businesses Thriving: An Employee Ownership Workshop or get in touch at business@workforce.org.
[1] Based on responses to 2018 General Social Survey questions on employment and purchasing preferences among Americans in the workforce.
[2] Blasi, J.R., Kruse, D.L. and Weltmann, D. (2013). “Firm Survival and Performance in Privately-Held ESOP Companies,” Sharing Ownership, Profits, and Decision-Making in the 21st Century, Advances in the Economic Analysis of Participatory & LaborManaged Firms, Volume 14, 2013, pp.109-124
[3] Democracy at Work Institute (2014). US Worker Cooperatives: A State of the Sector Report. https://institute.coop/sites/ default/files/resources/State_of_the_sector_0.pdf
[4] Blasi, J.R., Kruse, D.L. and Freeman, R.B. (2017). Having a Stake: Evidence and Implications for Broad-based Employee Stock Ownership and Profit Sharing. Third Way. https://www.thirdway.org/report/having-a-stake-evidence-and-implications-forbroad-based-employee-stock-ownership-and-profit-sharing
[5] Rutgers University School of Management and Labor Relations and SSRS, Employee-Owned Firms in the COVID-19 Pandemic (Washington, D.C.: The Employee Ownership Foundation, 2020), https://employeeownershipfoundation.org/sites/eofmaster/files/2020-10/EOF_CovidResearch_Oct23b.pdf. This research was supported by the Employee Ownership Foundation.
[6] Exit Planning Institute, as reported in Forbes.com.