Understanding Employee Ownership

Your company has decided to set up an employee ownership plan and informs you that they now consider you part owner in the company. But looking at your ESOP or other stock option, you don't understand why it seems like you don't have the same rights (or any rights) as the other owners. Where's the benefit?

To find the answer, you need to look below the surface. Ownership can be a tricky concept if you're not used to the ins and outs of options. There are different kinds of ownership rights, and it's often dependent on what you have contributed to earn it.
If you own your shares directly, you have a right to sell them to a buyer, although exactly when you can sell your shares depends on the plan your company offers. In ESOPs, for example, only when an employee leaves the company can they sell their shares. Other options usually allow you to sell shares almost immediately after you purchase them. For as long as you have the ESOP or other option, you get the same value increase that everyone else gets on their shares.

As employee owners wait to sell their shares, they may also get a benefit in the form of dividends (payments from company profits dependent upon the number of shares you own.) Some public companies pay dividends, while the majority of private companies don't. The reason for this mainly lies in the fact that dividends are taxed to both the individual shareholder and the company. Frequently, a better alternative is to simply keep the money in the company to allow the value of the shares to grow. (An ESOP is generally different, however, since companies are allowed to take a tax deduction for dividends paid to participants or used to repay an ESOP loan.)

Buying shares in a company will usually entitle you to an annual financial report or other form of financial statement from the company. If you partake in an employee ownership plan through your company, however, don't be surprised if you do not receive this information. Companies that participate in most ESOPs and some other options will offer to share some key financial information with employees as a symbol of trust, but it isn't a rule.

If you purchase your shares directly, you normally have the right to vote on policies and other issues unless you've purchased non-voting shares (in which case, you probably have other rights to make up for it.) In an ESOP, it's a requirement that you be allowed to vote on some subjects, but the right to vote on issues like new board members is left to the discretion of your company. If you have an option other than an ESOP, you can't vote on issues until you have completely purchased them.

Perhaps the most important right for you to have is the right to receive the same price for a stock that all shareholders receive if the company is sold. This is applicable to any shares you own through an ESOP or other options.

As an employee owner, you won't have exactly the same rights as other owners, but that isn't necessarily a bad thing. The truth is that other owners used their own money to purchase (and pay taxes on) shares at their full value. If you participate in an ESOP, this means the shares were allocated to your account and you don't have to pay taxes on them until you get the shares. With other options, you still have the opportunity to purchase shares at a discounted rate. Either way, ownership is being provided as part of an employment benefit package-you're buying the shares by working at your company, earning you those shares over time.

When you leave the ESOP (or exercise your options) you take full ownership and responsibility of the shares, giving you the same rights of any other full owner. Until then, enjoy the best benefit of employee ownership: taking part in the increase of the company's value. If you were a full owner instead of an employee owner, this right would eat up most of your investment before you saw a dime.