Not Everyone Loves ESOPs (Part III)

By J. Michael Keeling, ESOP Association President

In this, our final installment on common criticisms of ESOPs—and why they are wrong—we’ll look at the assertion that ESOPs are not real ownership.

According to cynics, ESOPs are “fake” ownership plans. In “real” ownership, they argue, the owners control their assets by determining such things as who runs the company, who sits on the Board of Directors, when major corporate decisions are made that might impact the future of the company, and so on.

But ESOPs are true ownership.

Cynics say that true owners do things like select the CEO and other executives, select the Board, determine pay and benefits, and decide how to dispose of assets—including whether to sell the company itself.

This criticism is nonsense. It equates having an ownership stake in a company with owning personal property, such as a car, house, or child’s teddy bear.

You can do what you wish with your personal property—buy it, sell it, or throw it away. But those who own shares in corporate stock do not tell the company that issued the stock what to do. Owning 50,000 shares of GM stock doesn’t entitle you to tell the folks at your closet GM plant what color to paint the cars, which models get four doors, or that it is time for the plant manager to find a new place to hang his hat.

Owning stock is not the same as owning personal property. It means you have a stake in the free enterprise economy, and can gain wealth therefrom.

For employee owners, holding shares of stock through an ESOP means they benefit from their own hard work. It means they can see a direct connection between their efforts and the health of the business—and their own personal financial health.

That is something that most businesses are seeking. Call it employee engagement or whatever other term you wish. Plenty of thought leaders and consultants encourage businesses to treat their employees like owners. But with an ESOP, employees truly own their fair share of the business—and enjoy all the potential rewards that brings.

Not Everyone Loves ESOPs (Part II)

By J. Michael Keeling, ESOP Association President

I often hear three criticisms about ESOPs: The second criticism is that ESOPs are a waste of taxpayers’ money. (For a discussion of the first criticism, see the Jan. 31 blog post.)

Cynics say the tax breaks provided to ESOPs are money losers because the majority of American taxpayers pay higher rates to make up for the cost of ESOP tax benefits.

But anyone who says that must not have done very well in elementary school when they learned basic math. ESOPs offer great returns on tax incentives.

It is true that there are estimates that ESOP tax benefits lower Federal tax revenues by as much as $2 billion a year. And yes, that is a great deal of money. But that money is not wasted. In fact, it generates a healthy return on investment.

Is starts with this fact: The most recent research conducted through the prestigious General Social Survey and funded by donations to the Employee Ownership Foundation shows that individuals at companies with employee stock ownership were laid off at a rate 7.3 times lower than those in companies with no stock ownership. (For more, see the Jan. 17 blog post.)

Look at the amount of tax revenue the federal government doesn’t collect when an employee isn’t on the job. Calculate that for all the people who retain their jobs at companies with employee stock ownership and you find that by keeping people employed, those companies help the federal government pull in $8 to $10 billion each year.

Put another way, the $2 billion invested in companies with employee stock ownership generates a return four to five times greater.

Anyone who thinks that is a miserly return should stay away from your retirement account. With returns like that, most of us could retire much earlier than we planned.

Not Everyone Loves ESOPs

By J. Michael Keeling, ESOP Association President

I am hearing increasingly from certain thought leaders that current ESOP laws do not create “good” employee ownership plans.

Anytime we ESOP advocates encounter someone who takes such a view of ESOPs, we need to ask ourselves, “Why does that person think ESOPs are not good employee ownership plans?” When we know the answer, we can counter the ESOP cynic’s point of view.

In my experience, there are three main criticisms of ESOPs. I’ll deal with each one in a separate blog post.

The first criticism maintains that ESOPs are bad retirement plans.

The argument here is that retirement plans should be diversified, to reduce the participants’ risk of losing all their assets.

But, ESOPs are great retirement plans!

First, more than 40 years’ worth of data show that, in the vast majority of instances, ESOP accounts provide better returns for their participants than any other ERISA plan—including the more numerous 401(k) plans. Simply put, employees who participate in an ESOP typically walk away with more money in their pockets than those who participate in a 401(k).

Second, data going back more than 20 years evidence that while 50 percent of Americans don’t have access to any retirement plan, more than 50 percent of employees who participate in an ESOP have access to a second retirement plan through their employer—usually a 401(k). So, most ESOP participants have access to the better returns available with an ESOP and the potential diversification of a 401(k).

What’s more—unlike 401(k)s—employees can participate in the vast majority of ESOPs without any out-of-pocket expense. So not only do most ESOP participants have access to a second retirement plan, the ESOP leaves money in their pockets that they can use to invest in that plan.

What if participants lack the funds to invest in that second plan—again, usually a 401(k)? Plenty of people live paycheck to paycheck and don’t see how they can afford to contribute to a 401(k) plan. For these people, the ESOP may be the only retirement plan they can afford—and may make retirement possible when it otherwise might not be.

That means ESOPs could be particularly good at sharing the wealth with those who need it most. It also means that any time an ESOP enables someone to retire, someone else gets a chance to earn a paycheck.

Finally, many praise the reduced risk that comes when investing in diversified assets. But diversification is meaningful only when the assets have significant value. Under the law, employees can diversify up to 50 percent of the assets in their ESOP accounts as they near retirement age. At that point, they are more likely to have significant values that benefit from diversification. And, because they are closer to retirement, those employees also will have greater need for the security that diversified investments are supposed to offer.

EO Firms Dramatically Better at Retention

For some time now, the data have shown that businesses with employee stock ownership are clearly better than conventionally owned companies at retaining employees. But new insights gleaned from existing research data show that, over a period of 12 years, businesses with employee stock ownership have gotten increasingly and dramatically better than conventionally owned firms at retaining employees.

How much better? Try 235 percent better!

Every four years, the General Social Survey (GSS)—often regarded as the single best source for sociological and attitudinal trend data in the United States—asks respondents if they were laid off in the previous year. The results, which are analyzed by Professors Joseph Blasi and Douglas Kruse of the Rutgers University School of Management and Labor Relations, show that for every person laid off at a company with employee owners, multiple employees were laid off at conventionally owned firms.

Further, this multiple has increased significantly each time the survey has been conducted.

Layoff Graph Ratio4 try

The graph above says it all: In 2002, for every employee laid off from a company with employee stock ownership, 3.1 employees were laid off from conventionally-owned companies.

Within 12 years, that number more than doubled: In 2014, for every person laid off from a company with employee stock ownership, 7.3 employees were laid off from conventionally owned businesses.

This GSS data would not be available without the work of the Employee Ownership Foundation, which provides funding that makes it possible for questions on employee ownership to be asked in the GSS.

This funding is not inexpensive, but as the data show, the results are invaluable to the employee ownership community.

Because the Foundation funds these questions, professors Blasi and Kruse are able to access all the data from the survey. As a result, they can cross tabulate the data and obtain new insights into employee ownership on a scale—and with a credibility—that might not otherwise be possible.

When Your Friends Aren’t Your Friends

By J. Michael Keeling, ESOP Association President

It would be easy for us to sit back and bask in the comfortable knowledge that the Congressional tax committees did not draft tax reform measures that negatively affect ESOPs.

Certainly, that is good news. But we can’t let that recent success cause us to remain ignorant of the fact there remain plenty of people who do not believe in the things that we believe—that ESOPs are good for our nation, our companies, and employees.

Sometimes that dislike for ESOPs can be harder to spot, because it is hidden under an apparent love for different forms of employee ownership.

A recent example: The Governor of New York signed a measure, which was passed by the New York State legislature, mandating that the State’s economic development activities encourage, support, and help create “employee-owned companies.”

That sounds like great news! Except that the details of the provision essentially rule out ESOPs, as we know them.

Specifically, the law says that state agencies should encourage trusts to hold company stock if both of the following are true:

  • The trust holds more than 50 percent of the company’s stock.
  • The employees elect the trustees.

This is a perfect example of the devil being in the details. Why?

I have visited nearly 800 ESOP companies, and I do not recall a single one that had employees elect the ESOP trustee or trustees.

In fact, I could make a legal argument that such an arrangement would constitute a violation of the law: The trustee must act in the best interest of the beneficiaries, and selecting that person requires a good deal of technical and specialized knowledge and expertise. Is the average person qualified to determine if a potential trustee is qualified? If not, the trust could be run by someone who—wittingly or unwittingly—does not act in the best interest of the plan participants.

And that is a violation of ERISA.

Retiring Early: Thank You ESOP!

By Rob Zicaro

Those who labor solely as wage earners all their working lives can never match the financial security that can be gained through long-term participation in an ESOP.

I know—I’ve seen it firsthand.

In 2015, I was able to retire early—all thanks to my participation in an ESOP.

I worked for 26 years as an employee owner of Web Industries. Having an ownership stake in my organization through an ESOP—as well as an opportunity to grow personally and professionally—made my ownership experience all the more meaningful.

I found that working in an ownership culture means you are more than just a hired hand. Instead of your ideas, creativity, and labor benefiting outside investors or one or more individual owners, the wealth created by the collective efforts of all the employee owners working together is shared with those who created that wealth.

Employee ownership through ESOPs is a powerful way to open up the free enterprise system to be more inclusive for working Americans and to truly change people’s lives.

For me personally, the financial benefits provided by my ESOP enabled me to retire seven years earlier than I otherwise could have. And that, in turn, has allowed me extra time to spend seven fulltime years on my original passion—music.

The financial security I’ve realized from my ESOP has enabled me to invest in a home recording studio where I now record original songs and release them on my own web site.

How cool is that?

Without the means to pursue my aspirations, writing the next chapter in my life would not be possible. And having this financial security also enables me to be self-sufficient, and not become dependent on social safety nets.

It’s clear that employee ownership through ESOPS is creating stories like mine throughout the United States, year after year. At a time when there is much talk about wealth inequality in our country, I’ve personally experienced how ESOPS are making a real difference in closing the wealth gap.

ESOP companies are about real working people, creating real jobs in communities, and creating opportunities for economic growth across our country.

The journey of creating a successful employee owned company is not without its challenges and share of risks. But being an employee owner through an ESOP offers the best chance to raise the standard of living for millions of Americans.

I know it has for me.

 

Sharing the Wealth at SJE-Rhombus

At SJE-Rhombus, The ESOP Association’s 2017 ESOP Company of the Year, everyone is benefitting from an ambitious plan to boost the company stock price.

Growing the stock price—and employee owners’ ESOP accounts—at warp speed was a goal CEO Dave Thomas set shortly after arriving at SJE in 2012. Called Vision 2020, the goal calls for boosting the stock price 3.5 times—three times greater than the previous all-time high—by the year 2020.

Why was the goal set so high?

“It would have been impossible to get there by just working harder,” says Thomas. “It forces us to do things differently and to find different ways of doing things. And the team has responded tremendously well to that challenge.”

To help employee owners meet the challenge, SJE shared a roadmap of sorts, to help employee owners understand how to reach the goal—and that it was attainable. The company explained what needed to be accomplished in different areas, such as sales growth, margin improvement, and cost control.

“We’ve helped people understand that saving $10K a year will have a certain specific effect on the share price. And now they can do that math in their heads,” says Thomas.

That kind of shared insight has impressed Sheryll Barraco, an Engineering/Marketing Coordinator at the company’s Milford, OH, location. “Everything we discuss, there’s a plan behind it, and this is how it is going to work, and this is why it is going to work,” she says. “That ties in to the culture because we all have to work together.”

The result is a force multiplier.

“We’re to a point where we can get ideas from anybody at any level at any location of the business,” says Thomas. “It’s because they understand how it could impact the stock price. And when you get that level of engagement, change becomes quite a bit easier because they know truly what it means to them.”

Says Barraco: “Knowing that the best that you do is going to come back to you monetarily…it’s a feeling, and it’s a good one.”

What If?

The response from employee owners—and its effect on the stock price—has been aided by encounters dubbed “What If?” meetings.

Each quarter, Thomas and SJE’s CFO— Taunia Suckert—visit each of SJE’s eight locations to discuss the share price. Employee owners who have questions or want to better understand the ESOP can sign up for a one-on-one session with Thomas or Suckert.

The sessions usually last about 15 minutes but can go longer, if needed. Thomas says that, on average, 30-40 percent of employee owners at any given location sign up for a session.

The meetings provide an opportunity for employee owners to interact with company leaders and to better understand the stock price and what causes it to move up or down. They also provide invaluable feedback to Thomas.

Early meetings, for example, showed Thomas that employee owners needed clearer explanations of how the stock price is determined and what factors influence its value. “Since then we’ve spent a lot of time and energy educating the team on concepts such as multiples and EBITDA,” says Thomas.

That investment is paying dividends. “When ideas on how to improve the business start coming from 400+ people who understand it—versus just the most experienced people, or just managers and supervisors—that’s where the true value starts to kick in,” says Thomas.

And the value is indeed kicking in—so much so that SJE currently is on pace to meet is ambitious stock goal a year early.

Now when Thomas visits employee owners, he hears different kinds of questions.

“Now I get more questions about what will happen after we reach that goal,” says Thomas. “That is a pretty clear sign to me that the team believes in what we’re accomplishing and that the momentum will continue.”