Abstract
The American Employee Stock Ownership Plan or ESOP is a leveraged buyout mechanism so that the employees in a company can, in effect, do a leveraged buyout of part or eventually all of their own company. ESOP is one of the most successful and unifying models for employee ownership in the world. Europe, however, lacks a generic model that could help the fragmented attempts at promoting employee ownership. The method used in the paper is a qualitative analysis of the US ESOP. We find that there are certain central features to the US model that should be maintained in the European attempts, and that there are certain flawed features that should be replaced by a better legal-organizational structure. The purpose of this paper is to analyze the main features of the US ESOP model and to define a technical description of the European ESOP, which builds on the good features of the US model and improves the flawed features. The paper also introduces the Slovenian pilot implementation of the European ESOP. The implication of the paper is to provide clarity on the structural features of the dominant employee ownership models, and to inform policy makers promoting employee ownership in Europe.
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Notes
One of the major shortcomings of the UK EOT is that they lack one of the most functional inventions in the co-operative and employee-centered companies, the individual capital accounts (ICAs) used by ESOPs in the USA, Mondragon co-operatives, and proposed for the European model.
Accessed on 21st of April 2022 on the website https://theconversation.com/new-budget-offers-canada-a-chance-to-get-employee-ownership-right-181019.
The first publication of the model dates back to 2019, when the technical concept was described in a paper published by the European Federation for Employee Share Ownership in Brussels (Ellerman and Gonza 2020).
Accessed on 8th of September 2022 at the website https://www.nceo.org/articles/employee-ownership-by-the-numbers.
Contractual workers and seasonal workers are excluded from the US ESOP scheme.
This was the case with United Airlines ESOP. A good take on the UA ESOP can be found on the following website—https://www.forbes.com/sites/fotschcase/2017/04/17/uniteds-troubles-could-have-been-avoided/?sh=44e155e7c062.
All of the Slovenian ESOP projects in the pilot phase are based on sellers’ credit since financial institutions need a functional example and/or a law before they are willing to participate.
One of the common problems with internal and employee ownership was the lack of an effective mechanism for preventing the degeneration through the selling of the shares to outside buyers. If employees are direct owners of shares, there is an incentive for each individual employee to look for a better price on the market for that share, if the legal structure allows that. Degeneration happens when shares are brought with employees into their retirement (and are then inherited) or when sold to outside investors, which gradually shifts ownership outside of the Company and ''degenerates'' the employee-owned structure.
The largest ESOP is a supermarket chain Publix Supermarkets with 207.000 employees. The list of biggest US ESOPs here—https://www.nceo.org/articles/employee-ownership-100.
We anticipate that the Slovenian ESOP will be legalized in 2023.
E.g., the rules on voting, different majorities required for decisions (high majority of 75%+ for decisions to terminate ESOP plan), rules on length of probation period before an employee is eligible to become an ESOP member, the distribution key that determines capital distribution to ICAs, etc.
The mandatory share is a standard obligatory one-time contribution that grants the rights to membership in a cooperative. We should emphasize that mandatory share in European ESOP does not provide claim to capital of the cooperative, but is simply a “ticket” to membership and can be as low as 10€ or 100€. This is decided by the employees or their representatives, who set up the rules of the system. The membership share is not revalued when the Company share value changes (that is the role of the ICAs) and is paid back upon exit.
The distribution key is usually tied to the wage differences in the Company, but it can also be more equal or completely egalitarian. In the US ESOP, the largest differences within ESOP can be determined by wage differences—the ESOP law proposal that we prepared for Slovenia considers the same limitation. Some of the pilot groups in Slovenia also decided to include the tenure with the Company as the additional variable of the distribution key.
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Ellerman, D., Gonza, T. & Berkopec, G. European Employee Stock Ownership Plan (ESOP): the main structural features and pilot implementation in Slovenia. SN Bus Econ 2, 186 (2022). https://doi.org/10.1007/s43546-022-00363-7
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DOI: https://doi.org/10.1007/s43546-022-00363-7