Cathy-SmallMeet Cathy, the Cooperative Development Institute’s new answerwoman! She can take on any co-op questions you might have, big or small. Today we ask: what’s the difference between worker cooperatives and ESOPs? See all of Cathy’s answers and ask your own on her home page.

This is an important question we hear often. And it’s a good one. If you’re interested in forming an employee-owned business, it’s important to know your options and what the different structures offer. With that said, worker co-ops and ESOPs are both employee-owned businesses with some similarities as well as distinctive differences. So let’s examine them both.

Worker-Owned Cooperatives

A worker cooperative is an employee-owned business where each member (worker) has one equal share of the business. This also means that every worker-member has one equal vote in the co-op–no matter their pay or how long they’ve been a part of the business. They are democratic businesses in nature.

Of course, different worker co-ops have different structures. Some are more hierarchical and have managers, an elected board of representatives, an elected president, etc. However, at the end of the day, in worker co-ops each of these bodies is accountable to the full membership. And in fact, these managers and the president of the co-op have only one vote and one share in the business themselves. What’s more is that the presidents are elected and empowered by the worker-owners themselves. However, other worker co-ops are more collectivized and horizontal in their structure. They have no internal hierarchy. Tasks and decisions may be delegated to individuals or groups, but the “board,” the top-governing body, is made up of all the worker-owners. (For more information, see “Differences Between Worker Cooperatives and Collectives.”)

Yet, no matter a worker co-op’s structure, at the end of the day the mantra remains: one worker, one share, one vote. As a result, worker co-ops are often more equitable in their internal labor practices than other kinds of businesses. For example, many worker co-ops have a pay-scale difference ratio that cannot be exceeded, such as Union Cab Cooperative in Madison, WI. This works by setting a company policy where, for example, the highest paid worker would not be allowed to earn more than four times the lowest paid worker. (Or whatever the co-op decides.) At co-ops like Valley Green Feast on the other hand, a deliverer of local foods to the Pioneer Valley region of MA, all workers are paid the same hourly wage, no matter what.

In addition, in the worker co-op world there’s a thing known as the patronage dividend. Basically, this is a member’s share of the distribution of the co-op’s profits at the end of each year. Oftentimes, worker co-ops may decide to distribute this based on hours worked or just give it out evenly; other times, it’s based on wages earned or relative skill contribution. But because the workers all own only one share of the co-op, no single person can receive a much higher return on their patronage dividend because they own more of the company.

ESOPs

An ESOP (employee stock ownership plan) has a completely different ownership structure. In this case a separate entity, a trust, acquires some portion, sometimes all, of a company’s stock, and holds it for the benefit of employees. The company generally appoints the trustees who administer the plan, which is largely a retirement or separation benefit. Employees’ accounts within the trust accumulate shares of the company based on various formulas, usually based on salaries as well as the pace of the company paying back bank loans for the purchase of company stock. The value of the shares at any given time depends on an annual independent valuation of the company. Typically employees receive the cash value of the shares in their account upon leaving the company. They never directly own the shares and only under rare circumstances can direct how those shares get voted.

ESOPs are not cooperatives–there is no direct ownership by workers of company stock – and there is no requirement to have the same democratic structure – employees do not generally get the right to “vote” the shares in their account (except in very specific, rare circumstances). That said, a growing number of ESOPs own 100% of their company’s stock, and that does change the nature of the enterprise. ESOP companies that invest in education and participatory structures enjoy productivity gains compared to non-participatory, non-employee-owned companies. (See “Key Studies on Employee Ownership and Corporate Performance” for more information.)

Just like co-ops, there are different ESOP structures. A few ESOPs, such as Once Again Nut Butter, are structured in their governance essentially like a worker-owned cooperative. Others, like the grocery-chain Publix (over 150,000 employees – the largest ESOP in the US), have a much more hierarchical structure.

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So, that’s some of the nuts and bolts of the differences between worker co-ops and ESOPs! Below are some more examples of each type of employee-owned business.

Other Worker Co-operative Examples:

Other ESOP Examples:

What do you think? Share your thoughts about the subject in the comments below, or ask your own question for Cathy!

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Ask Co-op Cathy: What’s the Difference Between a Worker Co-op and an ESOP?
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