Employee Ownership Is Capitalism—Just a Better Version

From time to time, a business will become employee owned and the press will issue glowing articles about how the person who owned the business “gave” it to his employees.

For free.

These stories are heart warming, but also inaccurate. More importantly, they sometimes give people the impression that employee ownership is a hand out, a call for socialism or communism. And that, too, is inaccurate.

There are different forms of employee ownership, and they can take different funding approaches, but none of them are hand-outs. And all of them make employees into at least partial owners. Employee ownership is about capitalism, but a form of capitalism in which everyone gets a piece of the pie.

The man who developed the most common form of employee ownership in this country would wince if he heard someone refer to his brain children—including the employee stock ownership plan (ESOP)—as a form of communism. Attorney and economist Louis Kelso felt unbridled capitalism was harmful and he espoused capitalism in which everyone had a chance to share in the rewards.

Fair? Yes. And still most definitely capitalism.

In Kelso’s ESOP structure, owners sell their businesses—in whole or in part—to a trust that holds the shares for employees and that operates on their behalf. The trust takes out a loan for the shares, and the loan is gradually paid back from the profits of the company.

Owners are getting paid. And employees are buying the company through their sweat equity, their contributions to the bottom line. Everyone owns, and everyone benefits when the business does well.

What Kelso espoused, then, was not less capitalism, but more. And he believed—passionately—that shared capitalism was good for employees and businesses alike. 

“When workers really understand that they are acquiring a share in their company and that what they do makes it more valuable, makes it produce more income, makes it beat hell out of the competitors, you don't have to worry about productiveness,” he told Inc.

In other words, making everyone into an owner makes a company stronger, which in turn benefits everyone.