by Karla Walter

[Editor’s note: The Washington think tank Center for American Progress (CAP) recently released a report advocating extensive state and local support for employee ownership. What are the best methods? The excerpt published here lists several policies that, if widely implemented, would substantially increase the number of employee owners. This material was published by the Center for American Progress, copyright © 2020. Sources can be found in the original.]

Policymakers in cities and states across the country are taking action to expand support for employee ownership. While the renewed interest in these sorts of policies is encouraging and will likely be expanded to more jurisdictions, there is far more that policymakers can do to support the growth of employee ownership and broad-based profit-sharing both in terms of expanding the public’s understanding of the benefits of profit-sharing and ensuring that government spending programs are deployed in ways that facilitate the expansion of these sorts of programs.

Specifically, CAP recommends that cities and states:

• Establish an office of employee ownership and broad-based profit-sharing
• Use public financing to facilitate ownership conversions
• Encourage government contractors to share ownership and profits with their workers
• Require government-supported tech startups to share equity, profits, or ownership with their workers

Establish an office of employee ownership and broad-based profit-sharing

Cities and states can encourage more companies to adopt well-designed sharing programs by creating an office of employee ownership and broad-based profit-sharing. Housed in a jurisdiction’s commerce department or economic development authority, this office would provide outreach and technical assistance to private sector businesses and workers and serve to improve government knowledge and support for all types of broad-based sharing.

Successful sharing programs are not always well understood by the business community or workers. The benefits and mechanisms for sharing capital broadly with workers are largely absent from higher education curricula, and companies often report that they are unaware of the benefits of sharing capital income and ownership broadly. They thus lack the technical knowledge to evaluate whether to adopt these programs or how to do so.

However, employee ownership and broad-based profit-sharing could provide important benefits to privately held businesses. Recent analysis by Project Equity—a nonprofit advocacy organization and consultant for companies interested in selling to their employees—estimates that Baby Boomers nearing retirement own more than 2.3 million businesses, employing nearly 25 million workers nationwide. Selling to employees—rather than to a competitor, larger company, or private equity fund—is one way for these owners to ensure that local jobs and the legacy of their company are preserved. But few owners know that employee ownership is a viable option. Additionally, companies are often unaware of how employee involvement in programs paired with profit-sharing or gain-sharing can improve business performance.

An office of employee ownership and broad-based profit-sharing should award grants—at a maximum value of $500,000 per year—to a university, nonprofit, or a partnership between these entities. The goal should be to create a center of employee ownership and broad-based profit-sharing as well as to promote these sorts of programs among existing business owners and develop this knowledge among future leaders. To the extent that a similar center already exists in the state, it would also be eligible for support.

These centers would promote employee ownership and profit-sharing as well as democratic workplace culture that allows workers a stronger voice on the job by providing education and outreach, technical assistance, training, and even modest grants to small businesses to conduct feasibility studies. Grants would also fund the development of various levels and types of curricula and courses on the topic as well as academic research looking at the effects of profit-sharing broadly and its effects on women, workers of color, and low-income workers. These efforts should prioritize recipients that target assistance to support the retention and creation of businesses in low-income communities.

In order to build knowledge of sharing programs and the impact of outreach, the office would also track various measures—including growth in the number of businesses and workers participating in these sorts of programs, participant demographics, and the effect of sharing programs on the state’s economy.

This concept builds on a successful model for increasing one type of sharing. As discussed above, employee ownership centers in Vermont and Ohio have successfully increased awareness and facilitated the conversion of small- and medium-sized businesses to an employee ownership structure. For example, a 2013 report found that the Ohio Employee Ownership Center has assisted about 15,000 employees in the purchase of all or part of their respective companies, adding an average of $40,000 to their individual wealth.

While several cities and states have recently funded new centers focused on ESOPs and worker cooperatives, state and local officials should also promote the benefits of stock ownership and profit-sharing in order to ensure that workers at larger companies enjoy the benefits of broad-based sharing programs. They should also support low-cost options such as employee ownership trusts that make sense for smaller companies.

Finally, the office of employee ownership and broad-based profit-sharing should help improve governmentwide support for employee ownership and profit-sharing programs. The office should serve as an advocate for improving government knowledge and support for well-designed, broad-based sharing. It should also increase awareness of how agency programs affect companies with sharing programs and promote the legislative or regulatory changes necessary to ensure that government policies encourage the adoption of existing and emerging sharing programs.

For example, these offices should evaluate the effects and total cost of providing additional tax incentives to business owners selling to an ESOP as well as how the government should promote and potentially regulate new forms of sharing—such as employee ownership trusts (EOTs)—and make recommendations on whether to pursue new policy in these areas.

Use public financing to facilitate ownership conversions

Employee ownership structures—including worker cooperatives, ESOPs, and now EOTs—are most frequently adopted by small businesses. According to the National Center for Employee Ownership, nearly 60 percent of ESOPs nationwide include 100 or fewer employees. Moreover, the ongoing wave of Baby Boomer retirements provides a significant opportunity to convert thousands of businesses.

Several cities and states help fund feasibility studies and transition plans for existing businesses, but policymakers should also ensure that businesses have access to sufficient capital to sell to their employees. For example, at the federal level, Congress recently enacted Sen. Kirsten Gillibrand’s (D-NY) Main Street Employee Ownership Act to ensure that small businesses selling to an ESOP or worker cooperative are able to access a U.S. Small Business Administration loan guarantee program.

Additionally, as discussed above, the city of Newark and the Newark CEDC are going further to target local business owners who are nearing retirement. The CEDC will finance not only the cost of hiring an independent trustee and appraiser, but also—in partnership with commercial lenders and private investors—the acquisition of the business by the ESOP trust.

The program should allow the CEDC as well as partnering investors to secure a moderate return on the investment while delivering cash at sale to selling owners and allowing them to avoid business broker fees. After a sale, the company will be required to train workers on their new roles as owners as well as the benefits of ownership. While the program is in its earliest stages, it is working with a handful of midsize companies on executing a sale to an ESOP.

Cities and states should ensure that all existing loan guarantee and loan programs aimed at supporting small businesses and economic development in the jurisdiction are available to firms transitioning to an employee-owned structure. In addition, cities and states—in partnership with the state or local economic development authority—should consider adopting Newark’s more active investment model.

Encourage government contractors to share ownership and profits with their workers

State and local governments finance millions of jobs across the U.S. economy with the hundreds of billions of dollars that they spend each year to purchase goods and services. Yet, jobs created through government contracting are often substandard, paying very low wages and involving poor working conditions.

Some governments have developed ways in the contractor selection process to give extra consideration to employers that create good jobs. Basing bidders’ scores in part on the quality of workplace practices, as well as other comprehensive criteria, can increase the likelihood that companies with better practices will win contracts and help motivate companies to improve their working conditions.

Government agencies frequently evaluate bidders’ proposals based on the strength of their technical ability and past performance record as they seek contractors that will provide the best value for the taxpayers—not simply the lowest price. They should use the same type of system to evaluate contractors on the quality of their workplace practices. Government agencies should give significant weight to those employers that provide decent jobs, including those that pay market wages, provide benefits, and share profits with their employees.

Incentives can potentially play a useful role in improving job standards beyond the contracted workforce and can reward employers that successfully create quality jobs.

Cities and states can encourage employers to improve job standards broadly by evaluating job quality across a bidder’s entire workforce that is located within the jurisdiction rather than evaluating only standards for contracted workers. While this sort of evaluation is not without precedent, state and local policymakers should nonetheless carefully consider the criteria for measuring work quality.

As discussed above, 36 states have adopted benefits corporation laws that require third party evaluations of qualifying companies’ workplace practices. Cities including El Paso, Texas, and San Jose, California, already consider the quality of jobs provided by a contractor when determining a winning bidder. Similarly, California and Texas are debating legislation that would provide a contracting preference for companies that workers own through an ESOP.

Finally, policymakers should ensure that a firm’s status as an ESOP does not preclude it from qualifying for contracting set-aside programs. Rules governing contracting set-asides for minority-, women-, and veteran-owned businesses should ensure that employee-owned companies are able to access these programs by counting each stock trustee and plan member as an owner.

Require government-supported tech startups to provide their employees equity

State and local governments frequently promote entrepreneurship and the growth of innovative startups through various types of economic development subsidies and assistance. These incentives can include grants, direct loans, support for private venture capital companies, and tax benefits for companies and investors.

For example, New York’s START-UP NY program allows growing businesses to partner with eligible university or college campuses and to operate tax free for 10 years. And Massachusetts’ MassVentures was formed in 1978 as a quasi-public venture capital firm to provide early-stage funding as well as grants to startups working to commercialize a product.

This early-stage seed funding often represents a relatively high-risk venture and is granted in cases when obtaining government support is essential to a firm’s survival. Many of today’s leading technology and biotechnology firms—such as Google, Apple, Tesla, Symantec, and MedImmuneC—were recipients of government support in their early years.

Tech startups pioneered the use of stock ownership programs in the mid-20th century as a way to reward all employees upon a company’s sale, but companies such as Intel, Hewlett-Packard, Science Applications International Corporation, Apple, Microsoft, and Google broadened the application of these programs over the next three decades to ensure that all employees were oriented toward the success of the company.

Yet, many tech companies have abandoned this practice in recent years, offering stock ownership to a much smaller sliver of top talent. For example, one study found that from 2002 to 2010, the portion of workers in the computer services industry benefiting from employee stock options fell by nearly 70 percent.

In order to help reverse this trend, whenever a government provides at least $1 million in assistance to a company, the recipient should be required to share profits or ownership with its workers when the company goes public or is sold to another firm. Companies should be required to demonstrate that the value expended on the top 5 percent of employees is equal to the amount spent on the bottom 80 percent of workers at the time of sale or public offering.

Recipients could comply with this requirement by setting up broad-based incentive programs with an ongoing awards system through grants of restricted stock unions, stock options, or an employee stock ownership plan. Alternatively, they could fulfill these requirements at the point of going public or a private sale, with the award of unrestricted stock with full voting rights or cash profit-sharing.

Government assistance can include grants, loans, loan guarantees, access to government-developed technology, and even tax incentives. Support would be measured cumulatively; a company receiving $1 million in assistance from multiple programs or at different phases of development would be required to meet these profit-sharing requirements.

While attaching a profit-sharing requirement to economic development subsidies would break new ground, many tech companies embrace broad-based equity programs and would likely already comply under this policy.

Conclusion

Employee ownership and broad-based profit-sharing programs can help to ensure that workers are rewarded for the wealth they help create, close racial wealth disparities, and strengthen local economies. While less than half of working Americans benefit from these sorts of sharing plans, state and local policymakers are increasingly interested in supporting their growth. In order to do so, cities and states should adopt policies to ensure that companies know about the benefits of sharing and that government spending programs are deployed in ways that facilitate the expansion of these sorts of programs.

Karla Walter is the director of Employment Policy at the Center for American Progress.