Canadian employee ownership,  Employee Ownership Trust

Employee Ownership in the 21st century

December 20, 2024 /

“Ask and it will be given to you; seek and you will find; knock and the door will be opened to you. 8 For everyone who asks receives; the one who seeks finds; and to the one who knocks, the door will be opened.” – Matthew 7:7

Ownership through history

For most of the history of human beings, employees did not exist; only slaves, servants land-owners and nobility. It wasn’t until the Industrial Revolution that the need for massive numbers of employees was created. People were needed to run the machines and factories of the new world of commerce. As we enter the 21st century, 3rd millennium and given the pace of new technologies such as AI, the nature of work is once more changing rapidly.

For most people wealth is created either by one’s own work or by capital growth through ownership of assets, including business assets. For some, wealth is created by both work and ownership combined, the impetus of the concept of employee ownership in existence in some form or other since the late 1800s. Fifty years ago the concept was codified in law in the United States and has been now adopted by many countries around the world. The most recent addition in Canada is EOT (Employee Ownership Trust) legislation enacted in 2024.

Employee Share Ownership Plans (ESOP)

Studies over the last 50 years comparing ESOP companies to non-ESOP companies show a clear advantage to the ESOP companies in financial metrics. Higher productivity, better retention and attraction of workforces, higher profitability, higher returns on investment, higher levels of and more robust innovations, and better employee relationships.

Employee Ownership makes sense to everyone

Employee Ownership is an interesting proposition for society as people who consider themselves capitalists support Employee ownership as a means of self-determination and wealth creation without the heavy hand of government interference. Socialists, on the other hand, support the concept as one that spreads the wealth, no longer limited to a tiny minority but shared among many. Both statements are in fact true in the ESOP world.

Why is an employee ownership model chosen?

It has been our experience that Business Owners decide to implement an ESOP for their companies based on two broad trends. The first is to attract and retain excellent employees so the company can grow and succeed. Studies show that ESOP companies attract and retain at a rate 200 % better than non-ESOP companies. The second is the desire of business owners to plan their succession. Especially for small and medium sized businesses, it can be very difficult for owners to find legitimate buyers. Studies show that in fact only 25% of small and medium businesses actually find a buyer and 75% actually sell the assets, close the doors and walk away. Other reasons for owners to choose ESOP include:

  • A desire to leave a lasting legacy, especially for Founders who have created a business from scratch and have worked in the business for decades
  • Creating wealth for valued and loyal employees who have helped build the business over the years
  • An altruistic desire to give back to the local communities where the business is based
  • Raising money for internal and external growth
  • Sale of a subsidiary that no longer fits the long-term strategic plan of the company.

    There are also two broad philosophies concerning the design and implementation of an ESOP. The first philosophy is Participative ESOP. In this approach the core of the ESOP is based on achieving specific goals for the ESOP and includes intensive communication with Owners and Employees. The Plan itself is created by consensus so that by the end of the process employees have a full understanding of how the ESOP works and their role in achieving the success of the Plan. The second is a non-participative approach. In this approach a plan is taken off the shelf by the consultant or lawyer and made to fit into the culture and structure of the business. The benefit of this approach is that it is less costly. However, studies show that the type of approach can have a significant impact on the success of the ESOP. A participative approach shows higher productivity rates, up to 10% per annum, while a non-participative approach can have a negative effect on productivity, upwards of 6% per year. The reason for this is that a participative approach creates trust, a key element in creating a successful ESOP.

    No matter the approach, the Owner has to also decide whether to implement an ESOP just for key people or a broad-based plan that would include all eligible employees in the company. A key-person plan is as already suggested based on the owner choosing certain people in the company (for example, the C suite or the management level or sub-sections of these groups). A broad-based plan is more inclusive and will spread ownership over a greater group of employees from not only key people but also non-management employees. The type of implementation, whether key-person or broad-based, depends on the Owner’s preference. Some Owners are more comfortable sharing ownership with only certain persons in the company and others believe that everyone is key in the company and therefore are more comfortable with a broad-based plan. Either type of Plan can be successful if a participative approach for the design and implementation of the ESOP is chosen.

    Who is ESOP Builders

    At ESOP Builders Inc we have worked with over 160 companies across Canada designing successful Employee Ownership Plans over the last 26 years. Properly designed ESOPs (Employee Ownership Share Plans) come from our process that builds successful ESOPs, based on the principle of TRUST.

    Now in Canada the Federal Government has added a new corporate structure, the EOT (Employee Ownership Trust), offering another alternative to implement your employee ownership plan and ultimately to create an Employee-Owned Company.

    To find out more about employee ownership at your company, please check us out. On our homepage you can find out if an EOT is for you and download the free guide or complete the free and confidential feasibility survey to get your ESOP or EOT feasibility review.