What Happens When Employees Become Owners?

The blueprint for a concept that many believe represents the future of organizational design is, perhaps, surprising: a 94-year-old grocery chain based in Florida. But Publix — a mammoth retail enterprise, with nearly 1,400 stores and US$57 billion in sales last year — is owned by its employees.

After working for 1,000 hours within one year, Publix staffers begin to accrue stock in the private company at no cost. As long as the grocer remains successful, the logic goes, its people will benefit — and benefit they do. Legends abound about cashiers who buy second homes and truck drivers who retire as millionaires. “It builds up quickly,” retired Publix deli clerk Virginia Conn told The Atlanta Journal-Constitution in 2016, having amassed an unspecified six-figure payout from just 13 years of service.

Employee ownership is not exactly a new idea. It’s been in place in some form at Publix for 65 years and has been common in the U.S. and the U.K. for decades. In Canada, by contrast, uptake has been relatively sporadic and slow. But with three-quarters of business owners set to retire in the next decade, and with new federal legislation designed to encourage employee ownership trusts (EOTs), that may be changing — and fast.

What, exactly, can employee ownership look like? And what happens when workers own a stake in where they earn their living? We spoke to three experts to understand what's involved.

How employee ownership works

Employee ownership is a concept with many definitions. But in practice, it tends to take three main forms.

The first comprises worker co-operatives, wherein everyone working for an organization owns it and participates in its management. These tend to be smaller operations with strong social mandates. Nova Scotia coffee roaster Just Us! roaster is an example.

The second includes employee share ownership plans, commonly known in Canada as ESOPs (equity or employee share ownership plan), wherein employees can earn or purchase an ownership stake of a business as an incentive or as part of their compensation. For public (or wannabe public) companies, these can take the form of stock option plans. While ESOPs usually represent a minority stake of overall corporate ownership, they offer a relatively straightforward way for employees to directly benefit from the growth of a company.

Finally, there are employee ownership trusts (EOTs), a succession mechanism wherein owners can transfer shares of a corporation to an employee-owned trust. EOTs are meant to give workers a clear path towards a more financially prosperous future. It also offers owners an alternative to the often-unappealing necessity of selling to a competitor or private equity firm.

In Canada, EOTs now come with the bonus of some pretty enticing tax advantages. In June, amendments to the federal Income Tax Act were passed into law (via bills C-59, which established EOTs as a new form of trust under the act, and C-69, which established a tax incentive for owners to consider using them). It means Canadian businesses can now qualify for up to $10 million in tax-free capital gains if they sell the majority of their business to their employees through an EOT or a worker co-operative. (Grant Thornton has prepared a helpful primer on the more technical aspects of what the changes mean.)

This development creates an “extraordinarily powerful” tool in the pursuit of a more equitable economy, says Jon Shell, a Queen’s University graduate who — as chair of Social Capital Partners and a steering committee member of the Canadian Employee Ownership Coalition — has been lobbying in favour of EOTs for years.

“Our economy is designed to funnel more and more wealth and ownership into the hands of very few people,” Shell explains. “As I saw that happening in my own career, I got interested in ideas to try to arrest that path. What are the different models that might shift the economy to still be capitalist, to still be productive, to still be growth oriented, but not necessarily result in so much consolidation of wealth and ownership?”

Employee ownership, in all its forms, holds the potential to do just that. And the evidence makes a compelling case that it works.

Employees can become more engaged

All those Publix millionaires — and thousands of their ilk from such employee-owned firms as the industrial manufacturer Amsted and the food retailer WinCo — demonstrate that there can be some clear and material financial benefits when employees become owners. While those are extreme examples, across the board, employee owners do earn more than folks who work under traditional corporate structures, and the model is thought to be especially economically advantageous to women and people of colour.

But the benefits to workers go beyond money. Employee owners are, by and large, happier and more satisfied in their work. “The research shows a clear correlation between employee ownership in some form and positive outcomes on indicators like job satisfaction, engagement and motivation,” says Jacoba Lilius, an associate professor with Employment Relations Studies at Queen’s University. Her research involves the organizational factors and interpersonal strategies that drive engagement and help people find meaning in their work. While the degree to which these warm-and-fuzzy feelings manifest tends to vary, there is very little evidence of much downside to employees when they own a piece of the company.

There are different theories as to why, but a major throughline is the notion of “psychological ownership,” as detailed in an influential 2003 paper by researchers from Central Michigan University and Governors State University. As owners, even with the most minor of stakes, employees start to feel more agency and excitement towards their work, as there’s a clear correlation between organizational performance and individual prosperity. Work can feel a lot less transactional and a lot more personal, which can make a real difference in the feeling you get when you clock in or log on each day. “When you become an owner, it affects the degree to which you identify with the organization, in terms of how much it is a part of who you are and how much you’re acting on its behalf,” explains Lilius. “It’s just deeper.”

Companies can become more competitive

Because employee ownership repositions workers as active participants in an organization’s success — not just passive recipients of a paycheque — it can have a real, and often positive, effect on business performance. Think about it as you would a home: Most people treat a house they’ve bought differently than they do a rental. It stops being just a place to live, and becomes a thing to improve, an asset to protect, a part of who they are.

Even a tiny ownership stake in a company can have the same effect — and that tends to be very good for the health of the business, says Elspeth Murray, director of the Centre for Entrepreneurship, Innovation & Social Impact and CIBC Faculty Fellow in Entrepreneurship at Smith School of Business. “The benefits are real, they’re large, they’re backed up by data and evidence,” Murray says. “In that respect, it’s as close as we get to a no-brainer.”

When people are incentivized to think outside of their roles and look beyond the immediate future, all manner of business bugbears kind of take care of themselves. To wit: on the whole, employee-owned companies grow faster and generate higher profits than the norm. They’re more productive and more innovative. During periods of economic strain, they demonstrate greater resilience and experience fewer layoffs. “When employees are owners, they really do work harder and work smarter,” Murray explains. “When there are tough moments, they can kind of roll with it, because they have a vested interest in making it through.”

Society can become a bit more equitable

At a macro level, employee ownership can play a role in correcting the creep of income inequality. Murray points to a 2021 Harvard Business Review article detailing research gathered by the U.S. National Center for Employee Ownership, which posited that if all businesses were to transfer 30 per cent of ownership to employees, “the results could be profound,” benefiting local communities and creating “life-changing gains” for marginalized populations. “It is a great way of creating more wealth more broadly,” Murray says, “so that it’s not so concentrated in the hands of a few.”

Experts agree that employee ownership is not a panacea. It can’t fix a toxic culture. It doesn’t tend to work as well when organizations are quite small, or very volatile, or are ultra-secretive about strategic goals and financial performance. The benefits are scant among companies fixated on short-term gains and cost-cutting. As with any big idea, poor execution can make things go awry.

But for all that, employee ownership is a lot more feasible for a lot more companies than a lot of people might think — much more so in Canada, now, thanks to the new EOT tax provisions.

For Shell and his fellow campaigners for the cause, it’s a moment that’s as exciting as it is important. “If you want to understand why our economy works the way it does, it all comes back to incentives: Who is incentivized to do what?” Shell says. “If we want to shift things, we need to shift the incentives, and this is a very powerful way to do that.”