By Firuza Huseynova • 5 min read

Last month, 55% of Canadian small businesses stated they did not have enough staff required to operate their stores. Despite wage hikes in many provinces, Canada has been facing the greatest labour shortage in generations. In light of increased resignations during the COVID-19 pandemic, more and more Canadian employers are wondering what they can do to minimize employee turnover and increase worker engagement. The solution? Transitioning to an employee-owned business structure, which, on average, increases worker retention rates, improves profit margins, and allows for a smooth line of succession upon exit.

“Employee ownership is perhaps the best-kept secret of our economy. It strengthens communities, fosters a financially savvy workforce, increases resiliency during recessions, and offers big benefits during economic booms.”

Quote from Kimberly Jones, president of Butler/Till, a marketing agency that transitioned to be 100% worker-owned after selling shares of the company back to its employees in 2014.

*Employees at a branch of Publix Supermarket, the largest employee-owned company in the US*

What is Employee-Ownership?

Kimberly is absolutely right about employee-ownership being a secret - in Canada, there are virtually no guiding frameworks, tax incentives, or legislation to support it in 2022. Our regulatory system is much less developed compared to the US and UK, so there is still a fair deal of confusion surrounding employee-ownership. To squash any misconceptions, I will define a few terms that people often associate with employee-ownership:

Social enterprise: A company (for-profit or non-profit) that operates with the goal of making a positive impact in society. For example, Nokee Kwe is London’s largest Indigenous employment and education centre, with a goal to put people above profit. A social enterprise may or may not be employee-owned.
B Corp (benefit corporation): A business that passes a comprehensive impact assessment and yearly ESG-related (environmental, social, governance) guidelines set by the Global B lap. Ben & Jerry’s is a great example of a socially conscious B corp; their overall B impact score is 110, compared to the median score of 50.9 for ordinary businesses. A B Corp may or may not be employee-owned.
Worker co-operative: A business that is democratically owned and governed by employee-members. There is a large emphasis placed on electing a Board of Directors and giving equal voting rights to all members (as in the case of Vancity, a Canadian financial services co-operative).
ESOP (employee stock-ownership plan): A plan offering directly-held stock options in a company, usually given to management or senior employees. For example, Starbucks offers a portion of employee pay in Bean Stock (restricted units of Starbucks stock SBUX) for longtime employees.
Employee-ownership trust: A legal entity that holds the shares of a company for current and future employees. Although none currently exist in Canada, there are 6,400 of these trusts in the US, which have allowed for 14 million workers to share $1.4 trillion in wealth over the last 45 years.

Overall, employee-owned businesses flourish compared to their traditionally-owned counterparts, especially in times of financial turmoil. There are numerous benefits of employee-ownership for employers, investors, employees, and society as a whole.

Benefits to Employers

Increased Employee Engagement: Employees are incentivized to think like owners in an ESOP structure, as they want the businesses to succeed as much as the C-suite executives. This translates into improvements in productivity and employee engagement.
Reduced Employee Turnover: Research shows that turnover is 3 times lower and layoffs occur 6 times less often under employee-ownership. According to the KPMG 2020 CEO Outlook (which surveyed 1,300 CEOs in January and December of 2020), CEOs perceive the risk of losing key talent as the #1 threat to their growth, jumping up 11 places from 2019. Employee-ownership improves worker retention, which cuts turnover costs and ultimately positions a business better for long-term growth.
Better Line of Succession Upon Exit: With employee ownership, owners can exit at a fair market price while recognizing employees and setting up a positive legacy at the same time. This is especially valuable now, as over 200,000 businesses could shut down permanently due to the pandemic, implying the value in finding new succession options to keep businesses alive for years to come.

Benefits to Investors

Lower Financial Risk: For the same reason small community loans tend to default less often, ESOP-owned companies experience lower risk. When the values of reciprocal interdependence, mutual benefit, and community are brought back into business, everybody wins.
Increased Returns: According to Barbara Baska, Executive Director of the National Association of Stock Plan Professionals, stocks of employee-owned companies (and even public companies that encourage employee-ownership) generally perform better than traditional companies.
Healthier Cash Flows: Every business only has so much cash at it’s disposable - offering ESOPs is an effective way to augment cash compensation that does not draw down a businesses cash reserves, leaving it to spend on investment in other areas.

Benefits to Employees

Increased Net Worth: Since employees can hold their shares in an ESOP structure over multiple years, their net worth is around 92% higher than that of traditional employees.
Greater Freedom in Retirement: The increase in net worth that comes with employee-ownership is especially beneficial for workers like Cathy, a front-line employee at WinCo, a discount supermarket located in the US which uses an ESOP to house all workers' retirement savings. Despite only being 42 years old, Cathy had amassed almost $1 million in company stock earnings over her career at WinCo, allowing her to retire at a young age and spend more time with her husband and 5 children. For comparison, most Americans have less than $50,000 in retirement savings at 40 years old.
Higher Work Satisfaction: Since the 2000s, studies have shown that workers value a healthy company culture over higher pay. Since an employee-owned company inherently values the voices of all employees and welcomes suggestions to improve the business, it’s workplace becomes much more egalitarian.

Benefits to Society

Economic Resilience: Multiple studies have shown that employee-owned companies performed better during the COVID-19 pandemic, the Great Recession, and the Y2K scare.
Local Job Creation: Employee-owned businesses are much more likely to create, grow, and keep jobs in the local community compared to their traditional counterparts, which are more swayed by incentives related to globalization.
Reduced Wealth Inequality: At the end of the day, even the most socially-conscious business perpetuates economic inequality if it is organized with a traditional ownership structure, since these structures often only serve to increase the wealth of owners at the top of it’s hierarchy.

*Employees at one of WinCo’s 89 discount store branches; their ESOP stock values (which make up around 20% of employees’ compensation) have increased by 18% compounded yearly since 1986*

After learning about all the benefits of employee-ownership, it’s only natural to wonder why all Canadian businesses aren’t employee-owned yet. Well, there are a number of barriers still in place. Firstly, the regulatory system is not primed for true employee ownership, as legalizing a framework for employee trusts has been incredibly difficult to establish in Canada. Secondly, traditional notions of what a business should look like (specifically, like a pyramid with a CEO at the top) clouds public perception. In other words, people are stuck in the past and resistant to change, especially the uber-wealthy C-suite executives who make their fortunes from relying on the labour of their employees.

Take Amazon, for example. Amazon currently does not disclose how much of their stock is owned by workers, but it is public information that Jeff Bezos owns around 10% of AMZN, meaning his net worth rises by around $321 million every single day. In comparison, the average Amazon employee made just below $82 a day in 2020. Considering this insane employee wage gap, I can’t help but wonder: how much longer will Amazon employees be content with the fact that their CEO makes 3,914,634 times more than them?

Although Amazon does not (yet) offer an ESOP, it is promising that many technology startups and small businesses are beginning to embrace employee-ownership more and more. Despite the barriers, there are steps we can take as individuals to ensure more Canadian businesses transition to employee-ownership in the future. If you’re a worker or entrepreneur who thinks your business could benefit from offering some form of employee-ownership, you can learn how to begin converting your business here and engage your manager in conversation next time you see them. Or, if you’re just somebody who wants to learn more about employee ownership, you can support Social Capital Partners, a Toronto-based non-profit that aims to educate Canadians on forms of employee ownership and fight for better regulation.

Sources:

Canadian small businesses face labour shortage despite wage hike, report finds

The ESOP Revolution: Fighting Financial Inequality and Empowering the Working Class

Amazon reveals how much it paid its median employee last year: $29,007

How Well Is Employee Ownership Working?

6 Successful Companies That Are Employee-Owned

There’s A Reason Why These Companies Are Top-Notch: They’re ESOPs

From Good Intentions To Meaningful Actions: Employee-Ownership Holds Company Accountable To DEI Improvements

Why Starbucks Pays Its Baristas With Stock: A Beginners' Guide To Company Stock

Building an Employee Ownership Economy

Make employee ownership a cornerstone of Canada’s economic recovery

Canadian business owners would embrace employee ownership if it was easier