The ESOP model was piloted in 1956 in the USA. It was also in the US that the model was first enacted into law, in 1974, with the passage of ERISA. ESOPs allow employees to become part-owners of the parent company through a buy-out financed by the company itself. The leveraged buyout is a widely used mechanism today, but was introduced with the ESOP model in order to give a wider population access to equity ownership.
In a nutshell:
Prevalence
- 6500+ companies
- 13.000.000+ workers
- ~10% private sector jobs
Benefits
- Leveraged buy-back
- Partial and staged buy-back option
- All workers can participate
- Individualised ownership
Challenges
- The fund manager can be set by management, not by employees
- Non-participative ESOP companies are less successful
- Paying employees who leave ESOPs can jeopardise the financial stability of the company
- ESOP stake divestment is not prevented
sloESOP builds on the support scratch from the US...
Leveraged buyout under the ESOP Fund
The sloESOP model creates a separate legal entity that holds shares in the company on behalf of the employees. The separate legal entity allows for partial redemption and leveraged buy-outs, while anchoring ownership among active employees, thus preventing leakage of employee ownership.
Involvement of all employees
The sloESOP model allows all employees in a company to participate in ownership. This prevents selective employee rewards and management buy-outs that negatively affect the company culture and do not fully exploit the potential of employee ownership.
Individualised ownership
The sloESOP model ensures that, in addition to the economic right to profit, employees also have a right to the capital value of the company.
...sloESOP IMPROVES CERTAIN US ESOP MEASURES
Workers' cooperative instead of a pension fund
The US ESOP is part of the pension system and therefore uses a separate pension fund as a separate legal entity. In the sloESOP model, the vehicle for employee ownership is a special type of cooperative called a worker-owned cooperative (WOC). The WOC becomes the owner of the parent company's share, and the employees, as members of the cooperative, have the right to choose their own representative, who sits in the company's general meeting. The administration of cooperative membership is simple and cost-effective.
Capital value roll-over system
In the US, ESOPs are required to pay the full capital value to the employee on exit, which often puts liquidity pressures on the company. sloESOPs pay out a portion of the capital value periodically according to the date on which it accrues, so that the employee's exit from the company does not trigger an additional financial liability for the company. Roll-over thus allows for a more predictable and sustainable management of the liquidity requirement in the event of employee turnover.
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Supported by the ACF Programme in Slovenia 2014-2021.
Read more about the project here.
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