Power to the People
Most pizzeria ownership reflects three standard models: a single proprietor with one or more shops; a corporate chain; or a franchise.
However, there’s another model that’s gaining traction around the U.S.: employee ownership.
While the concept may recall shopping for granola at burlap-draped co-ops, employee ownership is increasing in today’s hospitality arena, perhaps responding to dramatic changes provoked by the COVID-19 pandemic.
One industry old-timer is The Cheese Board Collective Pizzeria in Berkeley, California, which became a worker-owned cooperative in 1971 and has thrived for five decades in the birthplace of hippiedom. It’s a role model to multiple pizzerias in the San Francisco Bay area including Zachary’s Chicago Pizza, A Slice of New York, and Arizmendi Bakery.
Other big names in the food world embracing this framework include Publix Super Markets, the largest worker-owned company in the U.S. with over 200,000 members, along with WinCo Foods and Bob’s Red Mill.
We talked to a few experts to learn what employee ownership means, how it’s structured and the implications of launching as or converting to an employee-owned model.
Power (and Profits) to the People
It’s not just about helping workers; it can also improve the bottom line. “Employee ownership has the power to motivate employees, increase productivity, improve worker retention, keep jobs local, contribute to business longevity, and so much more,” says R. Paul Pflieger, director of communications at The ESOP Association. “Employee ownership also tends to reduce wage and wealth gaps. Most of all, it’s a great retirement option that most often requires zero contribution from the employee-owner.”
COVID-19 has forced a reckoning about what it means to survive in the hospitality industry as an individual and as a business. The workforce is shrinking due to a variety of factors including low unemployment, lack of benefits, unlivable wages and poor opportunities for advancement. Owners are struggling with staffing challenges, rising prices and uncertainty. Employee ownership can address all of these concerns, making such workplaces highly competitive and more resilient.
The Employee Ownership Foundation lists these goals of worker ownership:
- Reward employees financially
- Encourage employee retention
- Encourage employees to be loyal to the business and to pursue the company’s interests.
Worker-owned restaurants can be structured several ways. Regardless of type, success is defined differently when employees own a business. Rather than enriching one person, the company exists to provide a secure living for multiple people who have invested their time and talent into it. The Democracy at Work Institute describes it as a “values-driven business that puts worker and community benefit at the core of its purpose.”
Types of Employee Ownership
The employee stock ownership plan (ESOP) is unique among these options in that it requires no financial investment from members, making it very accessible. Under this structure, the company purchases all shares and holds them on behalf of workers. However, its relative complexity comes with high set-up costs, making it a poor match for companies with teams smaller than 15 to 20.
Another popular option is the worker cooperative, which suits smaller companies committed to democratic corporate governance. Usually worker-owners must pay a membership fee to join and receive dividends. Built-in profit-sharing is based on hours worked.
Both of these structures offer long-term incentives, because employees can only cash out their shares when they leave the company. As a result, these two types of ownership are best at retaining and rewarding staff, incentivizing them to perform their best and stick around for the long haul. The better the pizzeria performs the more valuable their ownership stakes become.
There are other options. Equity grants typically offer rewards and incentives only to selected workers, who typically have no role in company governance. With an employee ownership trust (EOT), the EOT owns all shares and disperses money via profit-sharing. With both employee stock options (ESOs) and employee stock purchase plans (ESPPs), team members need to have the financial resources to buy in, and should they sell their shares for immediate gains, they no longer have skin in the game in terms of company success.
Complex Structures Demand Due Diligence
Crafting a worker-owned pizzeria is a complex process that requires careful investigation and analysis, along with experienced legal and financial advice. Because these types of businesses are outside the norm, seek out banks and other institutions that are experienced with these legal entities.
“It’s a great decision and completely worth the time to explore because employee ownership brings so many things to a business beyond retirement security,” says Pflieger. He recommends speaking with a local specialist on the topic and attending a chapter meeting of The ESOP Association or a similar organization, where you can meet people at all stages of the transition, as well as professional advisers.
The many aspects to consider include:
- Set-up costs
- Long-term incentives
- Governance implications
- Employee benefits
- Tax implications
- Financing implications
- Number of workers
- How to allot equity, if applicable
- Vesting timelines, if applicable
Benefits of Employee Ownership
According to a study funded by the Employee Ownership Foundation and conducted by Rutgers University during the COVID pandemic, worker-owned firms were:
- Three to four times more likely to retain non-manager and manager employees.
- 3.2 times more likely to retain staff—even when other businesses received funding through the Paycheck Protection Program and the employee-owned firms did not.
- Significantly less likely to reduce employees’ hours or pay.
“Communities retain a company — including its jobs, products, services and economic contributions, because employee-owned companies tend to be very rooted in their communities,” according to Pflieger. In short, these companies outperform the competition while also keeping more money in the area.
Employees feel more valued and more invested when they’re owners. “You’re empowered and your opinions carry much more weight than within a typical hierarchical structure,” says Radcliffe Eccleston, community liaison for The Cheese Board. “You have the capacity to basically implement any changes you want, if you can convince the group that it’s the right decision. It’s a lot more responsibility but it’s reflected in the pay.” The company’s profit-sharing model distributes profits annually in proportion to the amount of hours each person worked.
Eccleston emphasizes that “employee retention is so much stronger here and we have fantastic benefits, but we have also cultivated this strong sense of community which makes it a really, really enjoyable place to work.”
Employee Ownership Resources
There are a number of local and national organizations that are dedicated to providing resources about employee ownership, including:
- The Employee Ownership Foundation – employeeownershipfoundation.org/
- The ESOP Association – esopassociation.org/
- The Democracy at Work Institute, representing the US Federation of Worker Cooperatives – institute.coop/
- The US Federation of Worker Cooperatives – usworker.coop/home/
- Worker Ownership Resources & Cooperative Services – workercooperatives.org/
- Sustainable Economies Law Center – theselc.org/
- Becoming Employee Owned – becomingemployeeowned.org/
- Project Equity – project-equity.org/
- National Center for Employee Ownership – nceo.org/
Annelise Kelly is a Portland, Oregon-based freelance writer.