There are ways that employees can either share ownership of a business or have some form of investment in the business beyond simply getting a paycheck. Workplace democracy can create a sense of accountability for the enterprise and its activities, which in turn can lead to improved job satisfaction and employee retention. Employees are motivated by more than just pay—and employees who feel their input and opinions are taken seriously are more committed to a company.
A worker-owned cooperative business is one that is owned and democratically run by its employees, who have both jobs and ownership interests. The National Cooperative Business Association counts around 300 worker-owned businesses in the United States. Some of the types of businesses in which cooperatives are currently flourishing include:
Democratic governance can mean different things in different businesses. A co-op has a board of directors, generally selected from the workers. Sometimes outside directors are brought in because they have valuable experience, advice, or skills to offer, but the board is always comprised primarily of workers. Some co-ops develop a traditional business structure with a hierarchical management tree, while others involve workers in decision making at all levels.
Profits from a cooperative business are distributed to the owner-workers. The distribution shares may be entirely equal in a management structure that eschews hierarchy or may depend on the employee's tenure, position, salary, or responsibilities.
In long-running cooperatives with a significant number of employees, new members usually undergo a probationary period during which they don't receive an ownership share. If accepted for membership, they buy in, either with a lump sum payment or by deductions from their paychecks.
Employee stock ownership plans (ESOPs) are offered by some companies as a benefit of employment. They don't create the same kind of ownership as a cooperative, because they don't always allow employees to have a meaningful say in how decisions are made. But they do create an ownership interest by allowing employees to purchase stock in the company, generally at a favorable price, as part of a retirement benefit package and as a way for the company to reward and motivate employees.
Creating an ESOP or co-op can benefit employers. While often described as a benefit of employment, an ESOP is actually a stock sale by the company to the employees, as a result of which the employees become part owners of the company. The IRS rewards employers for creating ESOPs by allowing them to defer taxes on capital gains realized from the sale. The same tax benefits apply to a company that sells stock to a worker-owned cooperative made up of the company's employees. This is a fairly technical area of tax law. If you are part of an employee group that wants to create an ESOP or cooperative form of ownership, or an employer looking to do so, you'll need to consult with a tax professional—as well as a lawyer—to put a program in place.
Profit sharing plans, in which employers share a portion of profits with employees according to a set formula, are usually established as part of a retirement plan. Contributions are made to the plan by the employer only, and then distributed to employees annually based on company profits and the employee's longevity. The distribution may be in the form of cash or stock, but sharing occurs only when the company is profitable. The idea is that by sharing in profits, employees will also share the motivation to make the company more successful.
Gainsharing is more of a direct reward system, in which employees share in profits created directly through productivity or cost-saving measures developed and implemented by the workers themselves.