An employee-owned business (also known as a corporatized employee stock ownership scheme or a ESO) is a business in which employees are the 100% owners. It is typically formed as a Dolite (DLT) of a for-profit corporation with many employees, where each employee is a shareholder and holds strictly speaking “stake” in the company.
In practice, this form of ownership is very similar to traditional private shareholding, where individuals or families purchase shares in the company. It is often mistakenly thought that ESOs are a form of Social Capitalism, as they often come with features that can be found in traditional capitalist systems (like employee retirement plans and dividends). However, they differ in that employees can own a fraction of a company, rather than an entire business, as in traditional capitalism.
Inevitably, we’re going to face a pandora’s box of employee engagement questions at some point in our careers. Perhaps the most critical question we’ll need to ask ourselves is: “Is employee ownership a good business model for digital marketing firms?” As always, there’s no one-size-fits-all solution to this question, but in this case, we’ll cover the bases so you can make the right decision for your company.
What Type Of Firm Do You Need To Be In?
Let’s get the easy question out of the way first. Are you looking to start a marketing company? You’ll want to consider all factors, including but not limited to, the type of firm you need to be in to be able to succeed. Before diving into the nitty gritty, let’s discuss a few of the most critical factors.
Pros of Employee-Owned Businesses
More Freedom For Employees
One of the biggest pros of employee-owned businesses is the freedom that employers offer employees. Unlike traditional businesses, there are no owners to please or entities to answer to. Instead, everything is up to the individual. This allows for more individual freedom, creativity, and sustainability. In theory, this can result in improvements in all areas, from pay to benefits to creative freedom.
The flip side of this theoretical improvement is that, in practice, these businesses can become very unstable. Without an owner to answer to, there is no minimum performance standard, and thus zero pressure to perform. Moreover, because there is no owner, there will also be no repercussions if the business fails. This makes employee-owned businesses particularly vulnerable to economic troubles. If an economic downturn occurs and revenues plummet, the shareholders are ultimately responsible for the collapse of the company. In a recent report, Vogue identified this vulnerability and concluded, “the most significant risk associated with employee-owned businesses is that, in general, they are more likely to fail than other types of businesses.”
The answer to this problem is simple; ensure that there is always a sufficient amount of capital available to cover liabilities and expenses. This way, in the worst case scenario, individuals will not be financially vulnerable as they will still have their shares of the company they worked for. Moreover, if the company is profitable, it will provide a solid return for all its shareholders, minimizing the risks associated with this form of ownership.
More Incentive For Employees
Another huge plus of ESOs is that they provide employees with a huge incentive to perform well. As mentioned earlier, in theory, this should result in superior work quality and higher productivity. In practice, though, this can lead to over-inspection by supervisors and managers. Instead of focusing on the big picture, they will be keen on making sure that each individual task is performed to standards.
In an ESO, every employee is expected to contribute equally and shoulder the responsibilities that come with the position. They have no choice but to deliver exceptional quality products and services because they will be held accountable to the same standards as the owners or managers of the business. Moreover, because they have no choice but to do their best, they will be more motivated to always perform at their best, which should, in turn, yield superior results.
More Flexibility For Managers
A flexibility for managers is another huge plus of ESOs. In theory, managers should have more leeway to manage their resources and to execute their plans because they will not be bound to metrics or objectives set by external parties. However, in practice, this flexibility can result in poorly thought-out and unnecessary work over-loads. This, in turn, leads to underperformance and, ultimately, to the demise of the company.
To be able to execute the plans set by the managers, the employees must have confidence that their supervisors will not interfere for the sake of saving a few thousand dollars per year or, worse yet, that they will work in partnership to deliver the greatest value to customers. This sort of commitment is difficult to imagine in a world where you are only accountable to your direct manager and the shareholders of the company. Moreover, in theory, this flexibility should result in an increase in productivity, but that is not always the case. In a recent survey, 63% of executives at firms with more than 250 employees said that the main reason for their organization’s lack of a strategic plan is because they do not have the resources to pursue one. In other words, managers are held back by limited resources, which, in most cases, stem from the fact that the company is employee-owned.
Improved Customer Care
Additionally, customer care is improved in ESOs because the owners and managers of the firm have a personal connection with the customer. This is especially beneficial during times of need. When a customer faces a problem, they will be more likely to seek out the help of the company instead of a help line or a technical support person.
The greatest benefit of an ESO, however, is that it is a hybrid of both public and private sector management. Typically, a firm that is part of an ESO will maintain a segment of their workforce that is based in the public sector (like a plant or a store) and a segment that is in the private sector (like an offering platform or software development).
Scalability
Scale essentially means the amount of money you can make with your product or service. Essentially, you want to be able to scale your company to a level where you can make a profit. This will require you to consider all of the various ways a customer can pay you (e.g., cash, retail, etc.). When choosing a business model, you’ll want to find one that allows you to scale rapidly while providing you with the stability to grow.
For example, if you’re the type of person who wants to strike out on your own to create your own marketing company, you might want to consider opting for shareholder equity since you’ll ultimately be responsible for generating the revenue. On the other hand, if you have invested a large sum of money in a specific product or platform, you might want to consider going the employee route since you’ll have more leeway to negotiate higher paychecks.
Real World Examples
While we can’t always rely on theoretical examples to provide us with the exact answers we need, we can certainly look to real-world examples to get us closer to the solution. As always, when we have a specific scenario we’re trying to analyze, we can turn to the internet for the answers. For example, if we search for “the top 10 employee-owned businesses”, we’ll get a number of results that we’ll want to review.
Looking at a few of the larger companies will give us a good picture of what sort of firm we’re dealing with. We can quickly eliminate a few of the larger companies since they’re publicly traded and don’t operate as independent businesses. This leaves us with a number of smaller and more unique companies that we can research in greater detail. To save you some time, we’re going to list the five largest companies that operate with this model below:
- Quinstreet (NYSE: QNS)
- One Medical (NYSE: OME)
- Caremark Rx LLC (NYSE: CMX)
- Front Row Capital (OTC: FRWC)
- Global HealthTech (OTC: GHTY)
The Downside To Employee Ownership
One of the most exciting aspects of the new venture of hiring employees is the ability to have a business you can walk around the corner and speak to anybody about. You can have an opinion about books, movies, music, and many more topics.
But, with great power comes great responsibility. What are the downsides to this newfound independence and what should you focus on in order to be prepared for the advantages?
While employee ownership is undoubtedly a good business model for a number of companies, it doesn’t come without its challenges. Here are just a few of them.
Potential Worker Insecurities
To be completely transparent, not all employees are created equal. Some employees might be more productive or engaged than others. While you might have the best of intentions when you opt for this type of business model, there’s no guarantee that all of your employees will walk that extra mile for your company. On the contrary, you might find that some of your employees aren’t as invested in your company’s success as you originally thought they would be.
Management Compromised
Even in the most ideal circumstances, as the owner of a marketing company that’s entirely employee-owned, you’ll still have to answer to a number of higher-ups. Depending on the structure of your company’s organizational chart, from day one, you’ll have to contend with a host of managers and middle managers who are likely more interested in protecting their positions than helping you achieve your company’s goals.
To take it one step further, since you’ll be reporting directly to the board of directors, even when you have the best of intentions, you might find that certain individuals in senior management don’t have the same desire to see your company succeed as you do. When this happens, you’re opening yourself up to potential conflicts of interest that could derail your company’s progress.
Productivity Issues
This may depend on how large your company is, but with limited resources, you’ll have to prioritize. If you have 15 people in your office, you’re going to have to scale back on some of your employee perks in order to have enough time to focus on the company’s growth.
When you have a lot of people working for you, it can be hard to maintain a good work-life balance. There’s always going to be somebody who needs help, and if you’re not careful, this can turn into a major productivity issue. It might not seem like it, but having 15+ people in an office setting is already a great deal of stress. When you add in the responsibility of producing great work while also maintaining a healthy life outside of work, it can be quite the juggling act.
Health Issues
One of the major downsides to having employees is the health issues that come along with it. It is well known that working long hours is bad for your health, and there’s a reason why most employers don’t offer health insurance to their employees. The medical costs can add up quickly, and it’s usually the small businesses that can’t afford it that get hit the hardest.
There are various health problems that come along with having a lot of people working for you. If you’re not careful, you may end up with medical issues because of all the stress and tension. It’s not unusual for businesses to be sued for workplace accidents, and with the added stress of having to deal with medical issues as well, it makes for a very dangerous combination. Health problems caused by stress are often complicated and take a lot of time to fix. It’s not uncommon for healthcare costs to increase by 10% just because an employee is stressed out at work. This is why it’s important to take a step back once you’ve established your employee-owned business and give yourself some time to recuperate before you head back to the grindstone.
Lack of Independence
A significant downside to having employees is the lack of independence that comes along with it. You’re going to have to set some rules and regulations for your employees, and it’s up to you to make sure they observe them. It’s natural for people to want to be their own boss and do what they want to do, but you must remember that they still need to answer to you. They’re not going to be able to do everything on their own, and there are going to be times when they have to ask for help.
It is important to have trust and confidence in your employees, so when help is needed, you can rely on them to come to you for advice rather than just giving it to somebody else. You also need to be available to your employees, and make sure they know they can come to you with any problems or questions. Even though they may feel secure in what you’ve given them, they will still feel vulnerable and independent enough to need help from time to time. This is what makes a true employee-owner; somebody who can stand on their own two feet, but also knows when to ask for help when they need it. Most importantly, it means they have confidence in your commitment to their well-being.
Additional Costs
One of the other major down sides to having employees is the additional costs that come with it. The costs associated with hiring and training new employees, paying overtime, providing adequate workstations, paying for office space; it all adds up. Even the little things like paying for lunch, parking, and travel costs can add up quickly for a small business. The costs are there, and unless you have a very high-end budget, it’s not a viable option to go down this route.
In some instances, it might be cheaper to lease office space, buy a smaller car, or eat lunch at work rather than pay for your own food. It’s important to weigh up all the costs and decide if this is a route you can take before you make a commitment. You’ll most certainly need to re-visit this decision at least once or twice before you decide whether or not it’s the right one for your business.
Mental Health
One of the other major downsides to having employees is the effect it has on your employees’ mental health. When you’re working with a bunch of people, you have to make sure you maintain a healthy work environment. You can’t go around scolding and insulting your employees, especially not if you want them to stay. There are ways to be both productive and humane, and if you find that you’re constantly losing sleep due to stress, it’s time to re-evaluate your decisions and consider an alternative route.
As humans, we’re not built to work long hours. It takes a lot of effort to maintain a healthy and happy demeanor while also producing great work. If you’re not careful, it’s easy for your productivity to take a nosedive, and you’ll find yourself losing sleep and making poor decisions. It’s not a good combination, and if you haven’t noticed, it usually leads to an even bigger problem down the line.
When somebody in your staff has a problem with stress or anxiety, it’s important to figure out the source of it so you can address it. Maybe they feel overburdened because of the responsibilities you’ve given them, or maybe it’s something else. When you start to see these types of issues repeatedly, it’s time to re-evaluate your decisions and consider an alternative route.
More Complexity
Another major downside to having employees is the additional complexity it brings. It’s not enough to say you have 15 people working for you. Now you have to think about how you’re going to manage them, and this usually means more complex systems and processes. It also means more people to blame if things go wrong, and this can lead to a complete mess.
It’s very easy to fall into the trap of trying to take on too much, only to discover you can’t keep up. You’ll find yourself overwhelmed, and eventually, burnt out. When this happens, everything stops; you can’t make payroll, you can’t keep the lights on, and worst of all, you can’t solve any problems. Your business grinds to a halt, and before you know it, your employees are out the door, looking for jobs elsewhere. The irony is not lost on us.
Managing a staff of 15+ is not for the faint-hearted. Even for the most experienced business owners, it’s a steep learning curve, and you’re bound to make a few mistakes along the way. It’s part of the process, and the only way you can get experience is by going through it. Make sure you have enough support around you, both mentally and physically; have a good coffee machine, and don’t forget to have fun. Celebrate small victories, and when things go wrong, learn from it and move on.
No Free Rides
In the grand scheme of things, none of us are promised a smooth road to entrepreneurial success. It’s a common enough occurrence for business plans to fall through the cracks and for startup companies to fail. When this happens, you might find that the hard-working employees who toiled away for years building your company only to have it fall apart due to lack of preparation or funding.
To be entirely frank, in the grand scheme of things, you’re probably better off sticking with a model where you own 100% of the company. At least then, you’ll have some recourse in the event your company fails. However, as tempting as it might be to go the employee-owned route, it’s still a risky proposition. If you do decide to pursue this model, make sure to do your research and educate yourself on the ins and outs so you don’t end up in the same situation as many other startups before you.
