During the Aspen Institute Economic Opportunities Program’s series on employee ownership, we’ve heard about employee stock ownership plans (ESOPs) and worker cooperatives, both well established models for ensuring employees benefit from the success of a business. However, the field is rich in innovation, and an ecosystem of companies, researchers, and practitioners focused on employee ownership trusts (EOTs) is emerging in the United States.
EOP convened a panel discussion on October 25, 2023, titled “Sustaining Ownership: The Promise of Employee Ownership Trusts.” During the event, the last in our three-part series on employee ownership, we heard from practitioners at the forefront of the EOT movement, including Leah Hamilton and Rick Plympton, manager of culture and organizational effectiveness and CEO, respectively, at Optimax Systems; Chris Michael, the founder and managing director of EOT Advisors; and Melinda Paras, the founder and former owner of Paras and Associates. Kristin Toussaint, staff editor of Impact at Fast Company, moderated. The discussion focused on the structure and operation of EOTs, the succession process, and the values and culture of EOT firms.
What are EOTs?
An employee ownership trust is a form of perpetual trust – one without a defined end date – that wholly or partly owns a company. “The default structure,” Michael explained, “is that the shares are held as a group for the benefit of all of the employees.” This legal obligation is overseen by the EOT’s trustees, though trustees are not involved in day-to-day business operations. (However, company staff may serve as trustees, as is the case for Optimax.) During succession, a business owner typically works out the trust structure with a legal professional, and the EOT, once created, gradually purchases shares of the company. As part of their mission to operate in employees’ best interests, EOTs share financial awards with workers and instill dignity and respect in the workplace. Finally, EOTs often require that companies maintain their independence in perpetuity – that they not be sold off unless there are extenuating circumstances, like insolvency.
Michael, the founder of EOT Advisors, saw the promise of EOTs 15 years ago when looking for an employee ownership approach that was sustainable and simple for businesses to undertake. He soon realized that this “new” model was already the most common form of employee ownership in the United Kingdom. There, EOTs employ more than 180,000 people, with hundreds of new EOTs forming each year, thanks to a government initiative encouraging their creation. Existing research suggests that the EOTs in the UK have a positive effect on job quality. They have reduced pay disparities in firms and support employee engagement in decision-making. Given the absence of a similar policy environment in the US, Michael stated that “our minor contribution here has been to identify that the purpose trust is a great vehicle for preserving businesses and dedicating their operations and the financial proceeds to social purposes.”
The Dollars and Sense of EOTs
For the panelists, EOT conversion has reinforced and sustained firms’ sense of mission. “There’s a strong … ethical and moral element to who these companies are,” Paras has found. “Just making profits for the owners [is] not the driving force.” Paras and Associates, which provides technology that facilitates medical interpreter services, is rooted in providing a social good, so selling to a competitor was not in the cards. “That seemed like a terrible idea to us,” Paras recalled. “We thought it would cut up the company, lay off all the employees, and just want our accounts.”
Optimax’s Plympton echoed the sentiment. “We wanted to make sure that the company would never be sold, that the company would always share at least 25% of the profits with the employees, and that we set a stage for decades of prosperity and growth so that we could continue to create jobs here in our community.” An EOT wouldn’t come as a shock to the precision optics manufacturer’s culture, but would instead preserve it “with as little disruption as possible.” The added stability of becoming an EOT strengthened Optimax’s position in the market, Plympton reported. “The optics we make are critical for [customers’] success,” he said, and “many of [Optimax’s] key accounts … doubled down with us and reinvested more in their relationship” after learning that Optimax wouldn’t be at risk of being sold to an outside conglomerate.
There is no one “right size” for a company to transition to an EOT. Companies advised by Michael range between 50 and 100 employees and are worth around $10 million to $20 million. But Paras and Associates counts about 10 employees, while Optimax employs more than 400 people. The upfront expense of converting to an EOT is relatively low compared to other forms of employee ownership. (For example, the cost of converting to an ESOP can run into hundreds of thousands of dollars.) However, the initial EOT transaction for Paras and Associates cost less than $100,000. Annual expenses to maintain Optimax’s EOT are about $5,000 to $10,000, said Plympton – low compared to the annual maintenance expense of an ESOP. Federal law mandates that ESOPs conduct yearly valuations, the cost of which, Michael estimated, is on the order of $50,000 to $100,000. EOTs are not subject to such requirements.
Seller financing is key for ensuring that employees don’t have to put up money for an EOT conversion. This form of financing entails the owners receiving the payout for their shares over a period of time, often several years. Seller financing over 15 years allowed Optimax’s transition to be completed without outside financing. Instead, 25 cents on each dollar of profit goes towards the EOT buying out Optimax’s ownership. Once the buyout is completed, that 25 cents will be reinvested in growing the company.
Reinforcing Job Quality
EOTs strive to provide quality jobs. Profit-sharing, practiced by Paras and Associates and Optimax, is common, allowing employees to benefit from the companies’ success. At Optimax, distributions, amounting to a quarter of profit, occur monthly and are equally divided among all employees. This is reinforced by Optimax’s embrace of open-book management, which provides employees insight into firm finances. Profit-sharing was also in place at Paras and Associates before becoming an EOT. But following conversion, a board of directors, of which all employees are part, was established. The board is charged with voting on how much of the profit will be passed on to employees. In addition to profit-sharing, both companies offer robust 401(k) programs, with matching contributions.
Optimax also created mechanisms for incorporating employee input. As Hamilton, who leads engagement at the manufacturer, put it, “ultimately, if we’re talking about ownership, it’s about employee voice.” The firm seeks to provide employees “the training, the tooling, and the information that they need to make good decisions every day,” laid out Plympton. This includes an openness to shop floor employees recommending improvements to make production processes more efficient. After all, Plympton said, “Our people know that if they can save a dollar, 25 cents is going to end up in that bonus pool.” And it’s a large pool. Plympton pointed to the fact that Optimax “did $500 million in business” during its first 30 years, half of which was passed on to workers through payroll benefits and bonuses.
What’s Next for EOTs
EOTs don’t yet have the name recognition enjoyed by other forms of employee ownership in the US. It was only by attending the National Center for Employee Ownership’s programming that Paras and Plympton learned about EOTs. Expanding education on employee ownership and engaging everyday business owners, as state employee ownership centers do, is vital for increasing awareness of EOTs and their benefits.
Education is equally important for business and financial services providers. Both Paras and Plympton experienced difficulty with local banks when converting their businesses to EOTs. Though Paras and Associates had established a strong line of credit with its bank, the bank was unfamiliar with EOTs, and the company had to switch to a new bank and reestablish its line of credit when converting. Similarly, Plympton had to align the trust documents with certain requirements from Optimax’s bankers, who did not initially understand EOTs. Finally, public agencies often won’t provide minority- and women-owned business certifications to employee-owned companies, even if a majority of the employee-owners fit a certification’s demographic criteria.
As it stands, EOTs are relatively new in the US and are laboratories for employee ownership experimentation. The insight provided by the formation of new EOTs and the maturation of existing ones will guide the development of this promising “evolution of capitalism,” as Plympton termed it. Stay tuned for more information on EOTs from EOP, including our next Employee Ownership Ideas Forum in Washington, DC, on April 9–10, 2024.