We're 100% Employee Owned... But What Does That Mean?

Editor's note: This post has been updated in April 2024 for comprehensiveness.

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?

As Airline Hydraulics celebrates its 75th anniversary, let's explore our unique ownership model, the Employee Stock Ownership Program. This blog post will answer all the commonly asked questions about employee ownership and the true meaning of being a 100% employee-owned company.

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Understanding the ESOP Model | Employee Ownership Benefits for Employees | Advantages of Employee Stock Ownership Program for Businesses | Employee Stock Ownership Program Organization | Employee Shareholder: How do employees become eligible to receive shares? | Employee Shareholder: How is a share's worth determined? | Employee Shareholder: What happens to shares when employees leave the company? | How is an ESOP different than a 401K plan? | Frequently Asked Questions | Resources 

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Understanding the ESOP Model

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, "I guess I can fire my boss!" But this is not how employee-owned companies function. The corporate structure and management roles of 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 the bottom to the very top, have the same stock ownership opportunities, which results in a (potentially) big payout upon their retirement.

Learn more about the ESOP model in our video, "What It Means To Be A 100% Employee Owned Business | ESOP 101."

10. 1. Advantages of Employee Stock Ownership Program for Employees 

With everyone working hard to increase their payday, all of the stakeholders reap the benefits.  Consider an ESOP a benefit for workers because these programs tend to be adopted by companies with a strong company culture and lower employee turnover rates. Additionally, employees enjoy larger retirement plan balances resulting from the growth of their stock shares as the value of the company increases. 

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.

24. Advantages of Employee Stock Ownership Program for Business 
    
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The corporate advantage of sponsoring an ESOP is the company becomes exempt from corporate federal income taxes. But it's mutually beneficial for everyone involved. It has a profound impact on company culture, employee morale, and retention. 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.

Employee Stock Ownership Program Organization

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. 

7. Employee Shareholder: How Do Employees Become Eligible to Receive Shares?

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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. 

Employee Shareholders: 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, fewer slices would need to be cut and each person would get a bigger piece. And conversely, if there are more employees, (like there was an acquisition), we'd need more slices to go around, 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, but those two are the major ones that explain why employee share amounts 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."

Employee Shareholder: 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 employee stock valuation based on their criteria, including but not limited to profitability, debt, and acquisitions. 

Employee Shareholder: 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).

Airline has paid millions of dollars of ESOP money to its retirees. Learn more about some of them by watching "Airline's Wall of Champions – Celebrating the Legacy of Our Employee Owners."

How is an Employee Stock Ownership Program Different Than a 401K Plan? 

An ESOP is considered a retirement plan, like the 401K plan, and both have vesting schedules for their balances. However, 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.

The concept of an employee-owned company through an Employee Stock Ownership Program (ESOP) is intriguing and beneficial. It truly demonstrates shared success. When a business is 100% employee-owned, like Airline Hydraulics, the benefits are twofold.

The company thrives through a collaborative work environment, and employees are more invested in making decisions that drive the business forward. Furthermore, an ESOP offers financial benefits, creating a purposeful environment and a valuable payday for employees at retirement.

Ultimately, an ESOP facilitates a unique team environment in which everyone has a stake and works toward a common goal—the company's success.