Complex Made Simple

Employee ownership can be the new capitalism

One of the most effective policies to spread wealth more evenly is to provide incentives for companies to share ownership with their employees

Many countries have laws providing tax benefits for employees getting stock options or other grants of equity One approach has proven durable and effective, that is creating a legal trust or association to hold shares for employees This new model of capitalism has been embraced in the US and the UK

By: Corey Rosen, National Center for Employee Ownership (US)

“The inherent vice of capitalism is the unequal sharing of blessings. The inherent virtue of socialism is the equal sharing of miseries.” 

— Winston Churchill

All over the world, a shrinking percentage of the population owns most of the corporate capital, and all over the world, people who work for these owners are having a harder time making ends meet or accumulating savings.

Capitalism is an extraordinary invention that has made the world as a whole much richer. Wealth in the economy is increasingly generated by ownership of capital, but it is unrealistic to ask most people to save their way there. Government policies could make an enormous difference.

One of the most effective policies is to provide incentives for companies to share ownership with their employees. In the U.S., these policies have been in place for decades, and the idea is now spreading to other countries. Over 9,000 employee ownership plans cover 15 million people. They have over $1.4 trillion billion in assets. Many of the plans own a majority of their company, and some are quite large. Research has shown these companies perform significantly better, lay people off much less often, and generate far more wealth for their employees. 

Many countries have laws providing some degree of tax benefits for employees getting stock options or other grants of equity, but few countries provide incentives for employers to grant these shares. The employees getting them tend to be those in the highest demand, especially in the technology sector. For employee ownership to spread to ordinary employees, companies need incentives to share ownership. There also need to be legal structures to assure that the incentives provided result in an equitable distribution of ownership among employees, such as their relative pay or their tenure.

Countries have experimented with a variety of ways to do this, but only one approach has proven durable and effective—creating a legal trust or association to hold shares for employees while they work for the firm.  Companies set up the trust and rules, provided all employees with a minimum number of hours worked in a year are eligible for benefits. Companies contribute shares to the trust or contribute cash to buy shares from existing owners. 

The company can take a tax deduction or get a tax credit for the contributions. In the U.S., companies with these plans (called Employee Stock Ownership Plans, or ESOPs, a very specific kind of plan under U.S. tax law) can also be exempted from part or all of their income tax and sellers to these plans in companies not traded on stock exchanges can defer capital gains tax by reinvesting the gains from the sale in other companies.

Other countries might use different approaches depending on their economic and tax landscape, but the core idea is the same—provide incentives for employers to share ownership in a way that 1) employees do not pay for out of their own pockets, 2) allocate the shares in a fair way, and 3) hold the shares while employees work for the firm then cash them out after they leave. 

This new model of capitalism has been embraced in the US and the UK both for all parties and ideologies. Employee ownership is also a significant player in China (Huawei is employee-owned), is growing in Europe, and has planted seeds in some African countries. It is time for the world to embrace this idea.

Corey Rosen is the founder of the US nonprofit National Center for Employee Ownership.   He co-authored Equity: Why Employee Ownership Is Good for Business (Harvard Business School Press, May 2005) and has been called the leading expert on employee ownership in the world.