Though not a solution for every business owner, employee stock ownership plans can come with benefits for company, customer and community
Story by Carol Heffernan
TALK TO ANYONE WHO WORKS FOR A COMPANY with an employee stock ownership plan – or ESOP, for short – and you’re sure to hear about the considerable benefits. Beyond becoming partial or full owners of the company, beyond accumulating assets and enjoying the equity gains their labor helps create, employees possess a sense of empowerment unique to most workplaces.
“Being an ESOP gives our company longevity because each employee has a piece of the action,” said Wayne Stellmacher, president of Keller Inc., a Kaukauna-based design/build general contractor that established an ESOP in 1986. “Employees are satisfied and stay with our company for 30 to 35 years. When you hold a team together that long – whether you’re playing sports or whatever else – you become pretty good at what you’re doing.”
Added Keller Chief Financial Officer Doug Stecker, “Employees get performance benefits and financial benefits. Every year the employee is getting stock in the company and of course the stock grows in value over time, so the employee is getting stock every year plus the growth in the stock every year. We feel we have a very productive work force not only in the field but also in the office. For every dollar that’s saved, employees know that’s going to the bottom line in their stock value.”
By definition, an ESOP is a tax-deffered retirement plan that buys, holds and sells company stock for the benefit of a broad group of employees, giving them an ownership stake in the company.
ESOPs were first made available in 1974 after the passage of the Employee Retirement Income Security Act, known as ERISA. Since then, thousands of companies – private and public, large and small – have adopted ESOPs for their dynamic financial, tax and organizational benefits.
The ESOP is funded with tax-deductible contributions by the employer, which can be in the form of company stock or in cash, which is used to purchase company stock. An ESOP operates through a trust and when employees leave the company, they receive their share options that the company must be able to buy back.
Client and community benefits
IN ADDITION TO MOTIVATING and rewarding employees, some argue ESOP companies provide distinctive benefits to their clients and even the communities where they are located.
“Customers notice that when working with an ESOP company, they can talk to any employee who is working on their job and that employee doesn’t pass the buck, doesn’t say, ‘You have to speak to my manager,’ because they’re employee owners; they are empowered,” said Tracy Williams-Prince, marketing coordinator at Keller.
ESOP companies are also key contributors to the tax and wealth base of local communities. The likelihood of the business relocating dramatically decreases when its owners are established in the area, and with greater employment stability comes higher productivity. What’s more, there is considerable research linking ESOPs to substantially improved corporate performance.
A study conducted by Rutgers University researchers Joseph R. Blasi and Douglas L. Kruse paired 1,100 ESOP companies with 1,100 comparable non-ESOP companies and tracked these business’s performances for more than 10 years. The study reported overwhelmingly positive and remarkable results indicating that ESOPs appear to increase sales, employment, and sales-per-employee ratios by about 2.3 to 2.4 percent above what would have been anticipated, absent an ESOP.
Georgetown University recently conducted a study revealing that in this recession, ESOP firms’ revenue grew an average of 15.1 percent, compared to a decline of 3.4 percent for more closely held industry revenue. ESOP firms also showed employment growth, faster wage growth, and higher average wages during 2008, compared to drop-offs in all of those metrics at other firms.
Support for ESOPs
THE BENEFITS OF AN ESOP must outweigh the daunting costs and complex processes that accompany launching a plan. Companies usually work with a host of ESOP specialists, valuation experts and attorneys. When deciding if an ESOP would work for a company, there must be careful examinination as to whether the ESOP is able to meet the objectives of stockholders, management and employees.
The ESOP Association, a national non-profit membership organization with a chapter here in Wisconsin, serves approximately 2,500 employee stock ownership plan companies as well as professionals in related fields committed to ESOPs. The benefits of membership can ease some of the administrative challenges for an ESOP, said Amy Gwiazdowski, director of communications for the ESOP Association.
“The ESOP Association provides its members with quick answers to technical questions involving employee-ownership operations and management issues. While not serving as a substitute for the competent and necessary professionals specializing in employee ownership creation and operation, the association has on staff persons knowledgeable about employee ownership, plus numerous technical publications.
In spite of the expenses and hassles, those involved with ESOPs agree that the challenges are well worth it.
Being an ESOP truly makes employee input a valuable part of the company’s decision-making process, indicated Craig Johnson, CEO of HC Miller in Green Bay, a 100 percent employee-owned manufacturer of organizational products and reseller of flexographic equipment.
“An ESOP structure is a great vehicle to allow our employees to participate in the fruits of their labor,” Johnson said. “Being an ESOP company gives employees a greater sense of purpose at work.
“Their voices are heard and they can be a big part of the decision-making processes that are taking place here. Employee ownership can translate to everyone caring about what they do more than a normal organization where the employee doesn’t have ownership. Employees work harder, care more and will go the extra mile for the customer.”
Carol Heffernan is a freelance writer who recently moved to the Oshkosh area with her husband Kevin and young daughter Eavie.