You may hear companies proudly proclaim they are employee-owned. But there's always some mystery to that sentence that leaves people wondering how employees "own" their company. Does that mean everyone is in charge? How does employee ownership work?
When a company is employee-owned, it has an Employee Stock Ownership Program (ESOP). However, it's rare and beautiful to be 100% employee-owned like Airline Hydraulics (many companies with an ESOP are only partial). In this article, we'll answer all the commonly asked questions about ESOP and the true meaning of being a 100% employee-owned company.
What does "employee ownership" mean?
Employee ownership means no single person, family, or third party is a majority shareholder of company stock. Instead, the company's stock is allocated among employees through shares (details on this to follow).
When first hearing about an ESOP, people may joke, "Great, now I can fire my boss!" But this is not how employee-owned companies function, and In fact, management roles for an employee-owned company mirror those of most workplace organizations. However, working for an employee-owned company is a positive experience because employees at all levels of the organization (from rank and file through senior management) have the same ownership opportunities. It's an actual team environment.
Fun fact, Airline Hydraulics Corporation has been 100% employee-owned since 2005! We divide our company's stock into shares that become available annually when past employees retire, move on, or when employees who have worked for Airline for ten+ years sell back their stock to diversify their portfolio further.
How do employees become eligible to receive shares?
While each company may deploy its own rules for enrollment, at Airline, employees automatically become eligible for shares just by working for us! The employee must also be at least 21 years of age and worked for Airline for at least 1,000 hours during the calendar year.
How many shares does each employee get?
This is a tricky question, so it's a little easier to imagine this concept through one of my favorite foods - pizza! Imagine the pool of available stock is a big ol' pizza pie that employees share at the end of each fiscal year. Every year, the size of the pie changes. When employees leave the company or sell back their shares, the pizza pie gets larger. So, for example, if the year was full of people retiring, the pie would be bigger, so employees could enjoy a bigger slice that year.
Also, the number of people splitting the pizza pie changes every year. If the company size is smaller that year, the number of slices needed is smaller, so each piece will be bigger. And conversely, if there are more employees, (like there was an acquisition), we'd need more slices, and each piece will be a little bit smaller. Other elements may also affect the pie size and the number of slices it's split into.
Now that I've made you hungry, this concept accurately describes how the number of shares employees receive can change a lot year over year. But despite these fluctuations, at Airline, the process and calculations are the same each year, ensuring every employee gets their "fair share."
How is a share's worth determined?
Every year, an independent firm reviews the company's financials, turnover activity, budget forecast, and any economic conditions that affect its business. Then, the firm prices the company's stock valuation based on their criteria, including but not limited to profitability, debt, and acquisitions.
What happens to shares when employees leave the company?
When an employee-owner leaves the company, the company purchases back their shares. At Airline, that individual will receive payment for their vested ESOP balance through five equal installments over five years, after a five-year waiting period (in most cases).
How is an ESOP different than a 401K plan?
An ESOP is considered a retirement plan, like the 401K plan, and both have vesting schedules for their balances. But an ESOP differs from a 401k plan in that a 401k is primarily employee-driven, meaning each employee funds their 401K account via paycheck deductions. There are no paycheck deductions for ESOP benefits. The company makes contributions to eligible employees' ESOP accounts.
If everyone is an "owner," who oversees the company?
As mentioned earlier, management roles for an employee-owned company mirror those of most workplace organizations. Each company has its own process for overseeing its ESOP, and its company as a whole.
Regarding Airline, our board of Directors works for our employees (the shareholders). The Board of Directors oversees Airline's management, making sure all activities are to the benefit of the company (and shareholders by increasing the stock valuation). Airline's CEO and management team report to the board. Then the board reports to the Trustee, who is the caretaker of Airline's stock.
What are the advantages of being part of an ESOP?
The corporate advantage of sponsoring an ESOP is the company becomes exempt from corporate federal income taxes. However, an ESOP is a triple win! Employee-owners also win by working in a purposeful work environment with a valuable payday at retirement. With everyone working hard to increase their payday, all of Airline's stakeholders reap the benefits!
How does an ESOP affect company culture and morale?
When a company is 100% employee-owned, employees have a true stake in the company's success and feel more inclined to make day-to-day decisions that drive businesses forward. When Airline's employees take pride in their work, it's because they have a real investment in the company's success. This is all reflected in our company culture.
But don't take our word for it; listen to our employees:
"I work for Airline because of the collaborative work environment. We all work together as a team to get the job done." Says an Internal Cylinder Repair Coordinator, "To me, true ownership means taking the initiative to bring about positive results. I take pride in my work and will go the extra mile to complete a task."
At Airline, ESOP isn't just a buzzword. We prioritize investing in our biggest assets, our employee-owners. All 300+ employees at our office locations are encouraged to reach new heights while serving our customers within the fluid, power, and automation markets. All employees at Airline are able to succeed as individuals in a thriving 100% employee-owned culture where our core values and employee ownership are the two key pillars.
Have a question about employee ownership or Airline Hydraulics? Let us know in the comments below!