How to address the growing income equality gap? Raising the minimum wage may help, but a more structural solution is to give workers a bigger piece of the pie through ownership. For business owners that want to share the wealth with their workers, there are two main ways of doing this: employee stock ownership plans (ESOPs) and worker cooperatives.
Interest in worker ownership is growing, according to a new report published by the Surdna Foundation. Called Ours to Share: How Worker-Ownership Can Change the American Economy, the report examines these two flavors of employee ownership and their potential to address some of society’s more pressing ills.
“At their most basic level, worker co-ops and ESOPs make working people into part-owners of the enterprises where they are employed,” explains Sanjay Pinto, a sociologist and author of the report. Worker-owned co-ops run the gamut from Cooperative Home Care Associates in the Bronx to Real Pickles, while Gore-Tex and Dansko is 100% employee-owned through an ESOP. And more companies are joining the club.
What’s driving the surge of interest? The Great Recession was a wake-up call that triggered more enthusiasm for economic alternatives, says Pinto. In addition, a wave of Baby Boomers are reaching retirement age and looking for ways to cash out that also benefit long-time employees. Outside buyers can be hard to find, and employees are often willing to step up.
The report attempts to dispel common misperceptions about employee ownership. Despite common wisdom, ESOPs and worker co-ops tend to be as efficient and productive as conventional companies. In addition, research shows that in ESOPs and/or co-ops, workers have more job security and build greater wealth over time. Pinto likens the situation to high-tech firms in Silicon Valley that hand out share ownership as a way of motivating employees to work hard and stick around (although that tends to be more of a thing for higher-level folks).
Capital a Challenge for Coops
While the number of worker co-ops in the U.S. still are pretty low, they’ve been rising, according to Pinto. There are around 300 to 400 today, and 80 or so o them were started from 2010-2013.
In these worker-owned coops, members, who are workers, have equal shares in the company and equal votes. “It’s a way to organize enterprises in which broad-based ownership is coupled with broad-based control,” says Pinto. One example: Evergreen Cooperatives Initiative in Cleveland, which was launched in 2008. It has three worker-owned businesses—a laundry service, a sustainable energy provider and a greenhouse–aimed at helping low-income residents reap the benefits of providing services to the schools and health-care institutions in the University Circle neighborhood.
At the same time, the total number of worker-owned co-ops is still underwhelming. Why? The report points to a few factors, but most important may be challenges raising capital from banks and other lending institutions.
“Despite evidence showing that worker cooperatives are just as productive as conventional firms, and no more likely to fail, most mainstream lending institutions are not armed with this set of facts. So the perception that worker cooperatives are some kind of novelty, unlikely to succeed, is likely to color their perceptions and lending decisions,” says the report.
There’s considerably more activity in the ESOP realm: About 7,000 businesses employing 13.5 million workers use this structure. These retirement trusts, which invest in company stock and hold assets in individual employee accounts, were established with the passage of the Employee Retirement Insurance and Security Act (ERISA) of 1973. Workers have anywhere from 30% to 100% of share ownership, though most are not majority worker-held. The governing structures of these organizations range across the map, from giving workers added benefits to something resembling a co-op, but all plans have to give employees some voting rights regarding matters such as mergers, acquisitions and liquidations.
While there’s no one-size-fits-all solution for every company, employee ownership is a compelling approach for business owners and entrepreneurs to explore. As owners, workers may be more motivated and productive. The data also suggests that turnover is lower in firms with broad-based employee ownership. And by allowing employees to build wealth through equity, it might just begin to shift the disturbing patterns of wealth concentration.
Anne Field is a New York-based journalist who writes about social enterprise and impact investing. A version of this article originally appeared on her Not Only For Profit blog on Forbes.com.