Perhaps the ultimate gainsharing approach is for employees to own the company. Many companies have stock purchase plans that allow workers to buy shares in the company, thus “owning” a fractional part of the firm and sharing in its success.
A revolutionary approach by which employees may own their company is called an employee stock ownership plan (ESOP). Although it may be created in a variety of ways, an ESOP is a means for employees to buy stock in the company. Stock is “sold” to employees, who often “pay” for it by accepting stock shares instead of payor pay raises. Or employees may simply pledge to buy stock as a way of helping a company payoff a debt. ESOPs can be used in other ways that can be called “creative financing.” The ESOP as a separate legal entity may:
- Buy the stock with borrowed money secured by the stock and employee pledges.
- Buy the stock with the funds from a tax-deductible contribution made by the company. (An owner who wants to sell may authorize a tax-deductible contribution to the ESOP so it can buy the stock, leaving the owner with cash and a tax deduction.)
- Create a new employeee benefit when a company contributes new stock issues to the plan.
- Make public companies private, spin off or divest subsidiaries, or save failing companies.”
Perhaps the most widely publicized ESOP involved National Steel Corporation’s creation of Weirton Steel Corporation.
The National Steel Corporation created an ESOP to divest its steelworks in Weirton, West Virginia. National assumed $5 million in unfunded pension liabilities and lent money to Weirton. Employees took a 20 percent cut in wages and benefits and agreed to a six-year freeze in their wage levels. As employees bought stock, National was repaid. The following year Weirton posted a profit. which was the largest profit per ton of steel among the six major steel companies.