Mandy Cabot wants to make sure the shoemaking business that she and her husband built over the

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Mandy Cabot wants to make sure the shoemaking business that she and her husband built over the past 20 years remains in good hands after they’re gone. The 58-year-old co-founder of Dansko, a West Grove, PA, company with more than $150 million in annual sales, says she fears that selling to a competitor, or a private-equity firm, would result in layoffs or other cost-cutting measures.

So last February, the couple transferred ownership of the business to its 180 employees. By “keeping it in the family” and giving workers a real stake in its future, Ms. Cabot says she hopes the company will keep going strong for years to come. “This is our baby, but at some point we have to cease being parents and become grandparents,” she adds.

Ms. Cabot, who launched Dansko in 1990 by selling shoes from the back of a Volvo station wagon, says the tax benefits associated with employee stock ownership enabled the S corporation to manage the long-term debt of buying out the couple’s ownership stake. But, she adds, “It’s not some tax dodge.”

Known as employee stock-ownership plans, or ESOPs, the move is being embraced by smaller firms, especially those struggling to find buyers during the weak economy. Under typical plans, an owner’s interest in a business is bought out, in part or in whole—often through a bank loan—with the stock being held in trust. Employees then cash in their shares as they retire.

Michael Keeling, president of the ESOP Association, a Washington lobby group, argues, “A company’s success isn’t just driven by the brilliance of the CEO, but also by its employees, and more owners feel [their employees] deserve something more for that.”

This week, a bipartisan group of lawmakers introduced a bill to encourage employee-ownership plans. But critics of the plans say owners who are looking for an easy exit are simply spreading the risks of business ownership by convincing employees to gamble their retirement savings. Andrew Stumpff, University of Michigan, says it’s bad enough to risk your retirement savings in a single company. But it’s even worse if that company is your employer, he says. “If the company fails, you lose your savings and your job.” That risk is very real, he adds, citing Enron, WorldCom and Lehman Brothers as examples of high-profile failures at shared-ownership companies, especially Enron Corp. where workers lost their savings.

The real attraction for owners, opponents say, is generous tax breaks that shelter capital gains and dividends tied to the plans.

As of 2011, there were an estimated 10,900 employee-owned businesses across the country, a 12% increase from 2007 and a record high dating back to the mid-1970s, when the plans first appeared, according to the National Center for Employee Ownership. Nearly all of the employee-owned businesses have fewer than 500 workers. Some 10 million employees are currently enrolled in these plans, representing more than $860 billion in assets, the group estimates.

Norman Stein, Drexel University, says employee ownership under the ESOP model causes more harm than good. Many of the plans are based on a bloated assessment of the value of the businesses. Many workers who are participating in the plans are left holding overvalued shares, long after the original owner has cashed out: “I’m not against employees owning some stock in their employer, but not if it’s tied to a retirement plan,” he says. “It’s a troubling trend.”

Separate studies by Harvard University and Rutgers, as well as by the National Bureau of Economic Research, have found that businesses with shared-ownership plans fared better during the recession than more traditionally structured firms, including fewer layoffs, higher productivity and stronger employee loyalty.

Dawn Huston, 31, started working at Dansko 11 years ago, sorting shoes for delivery. Now a warehouse processor, she says the idea of owning a piece of the company made her nervous at first—though she wasn’t worried about her retirement savings, since the company offers a separate 401(k) plan, she adds. Over the past year, she’s begun referring to Dansko as “our company.” “I feel like they consider us family and it feels like a family,” she says of the switch to employee ownership.

Adele Connors, 60, co-founder of Adworkshop, a Lake Placid, NY, marketing agency, says a move to employee ownership “really changed the culture of our company” with workers now being “more engaged.” Kelly Frady, 43, an account supervisor at Adworkshop, says the agency’s employee-ownership plan has fostered a team spirit among its staff. “Everyone knows that you do well and your stock will rise,” she says. “It’s a driving factor in making the company succeed in the long term.”

Kim Jordan, who co-founded the New Belgium Brewing Co. with her husband in 1991, says employee ownership ensures that the company’s values and culture will remain intact—including its commitment to sustainable farming and an environmentally friendly production process. In December, she extended full ownership of the Fort Collins, CO, brewery to its 480 employees.

“We’ve always tried to involve our people in the running of the business,” she says. The goal, she says, isn’t just to reward employees, but also to foster innovation by creating a company culture where workers think more like entrepreneurs.

QUESTIONS

What happens to employees’ retirement income if they are at an ESOP company that runs into financial problems? What happens to the same employees, if instead, they work at a non-ESOP company that runs into financial problems?