Advantages & Disadvantages of an Employee-Run Business

When they work well, employee-run structures create better results.

When they work well, employee-run structures create better results.

An employee-run structure for a business carries some real advantages. Many employee stock ownership plans come from owners that want to sell their interest in their companies and decide to let their employees buy it. Once the employee stock ownership plan becomes available, the company can benefit from increased retention and higher morale. On the other hand, ESOP companies tend to be more insular, and employees tend to overinvest in the ESOP, increasing their investment risk.

Higher Productivity

When you work at an employee-run and owned business, you're likely to be on a winning team. A study conducted at Rutgers University found that ESOP companies had between 2.3 and 2.4 percent higher growth in sales, sales per employee and overall employment than non-ESOP firms. A survey conducted in the United Kingdom showed that employee-run businesses were more effective at finding new clients than nonemployee-owned organizations.

Greater Opportunities

Not surprisingly, employee-run businesses invest in their employees. When you work at an employee-owned business, you're more likely to receive a promotion than to lose an opportunity to an outsider recruited for the position. You're also more likely to receive job-related training that makes you more effective at your position.

Varying ESOP Quality

Not every employee-run company is a success. When a company makes a commitment to employee ownership and to making employees a part of its entire structure from top to bottom, the structure can be very successful. Companies that do temporary ESOPs frequently fail, however, since employees won't truly buy in to what's clearly a short-term situation.

ESOP and Your Investments

When you're working for an employee-run company, you may want to leave your money in the ESOP. While your money's there, it grows tax-free. Plus, your wealth relates directly to your performance and that of your co-workers. You're taking a big risk, however, if you don't take advantage of the opportunity to diversify your savings. If your company fails, you could lose everything you've invested.

Employee-Owned Company Insularity

An employee-run company also has drawbacks. The company's willingness to look inward for people to promote can stunt its growth if it doesn't bring the right people in when it needs to. At the same time, many employee-owned businesses have trouble raising capital. In some cases, this happens because many ESOP structures saddle companies with debt. At other times, employees run the company primarily for their own benefit, which doesn't always impress an outside lender.

 

About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

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