Nearly 10,000 Years of ESOPs

About 40 years ago, a smattering of critics said ESOPs were nothing more than a way for wealthy owners to cash out of their businesses. The typical ESOP, these critics said, wouldn’t last more than a few years. After that, it would be sold to the highest bidder.

Those critics were right about one thing—ESOPs are a great way for owners to cash out of a business. But the critics misunderstood a vital factor that motivates owners to sell to employees, instead of someone else.

It is longevity.

When you start or own a business, you invest a great deal of yourself into it. You bear a responsibility to your customers, and to the people you employ. And the way you meet that responsibility reflects who you are as a person; it reflects your values and ideals.

If you value what you have built, you want to see it live on. And you want the people who helped build it to shepherd it into the future, and to be rewarded for doing so.

In short, you want your company to carry on.

If your business is solely a way to make the greatest amount of money possible, why go to the trouble of setting up an ESOP—which might sell to the highest bidder a few years later? Why not cut out the middle man and sell to the highest bidder today?

For proof that ESOPs are an enduring form of ownership, just look at the list of Silver ESOPs—companies that have maintained an ESOP for at least 25 years. The ESOP Association has been honoring members that reach this milestone since 2008. In that time, 386 member companies have achieved Silver ESOP status.

Take those 386 companies and multiply them by the 25 years they’ve each had an ESOP, and you come up with 9,650 years of ESOP management.

Any many of those firms are still going strong—which probably makes their founders and former owners very happy indeed.

(Additional materials: a video about this year’s Silver ESOP companies and the press release announcing this year’s winners.)

The 2016 Silver ESOP Award companies are:

American Systems Corporation, Chantilly, VA

Black, Gould & Associates, Inc., Phoenix, AZ

BRPH Companies, Melbourne, FL

Bryant Air Conditioning & Heating, Lincoln, NE

Cannon Cochran Management Services, Inc., Danville, IL

CTL Engineering, Inc., Columbus, OH

EBO Group, Inc., Sharon Center, OH

Edmund A. Allen Lumber Company, Momence, IL

First State Bancorp, Inc., Caruthersville, MO

Goettle Construction, Cincinnati, OH

Granco Clark, Inc., Belding, MI

Great Lakes Orthodontics Ltd., Tonawanda, NY

Jackson’s Hardware, Inc., San Rafael, CA

KCI Technologies, Inc., Sparks Glencoe, MD

Kemner-Iott Group Agency, Adrian, MI

Kendall Electric, Inc., Portage, MI

Messer Construction Co., Cincinnati, OH

Morton Buildings, Inc., Morton, IL

New England Controls, Mansfield, MA

Pavement Recycling Systems, Inc., Mira Loma, CA

Prime-Line Products Company, Redlands, CA

Rable Machine, Mansfield, OH

Slakey Brothers, Sacramento, CA

Telephone Electronics Corporation, Jackson, MS

Trans-Overseas Corp, Romulus, MI

Veterinary Service, Inc., Modesto, CA

How to Plan for the Baby Boomer Bubble’s Upcoming Cash Requirements

By Trevor S. Bare

Nearly 10,000 baby boomers—individuals who were born between 1946 and 1964—retire every day, according to the Social Security Administration.

With this large group of retirees, ESOP plan sponsors need to be prepared for repurchase obligations they may face in the near future. A repurchase obligation is an ESOP’s requirement to buy back employer stock from participants who are eligible to receive distributions from the plan.

There are various ways to fund these obligations. Typically the cash used to purchase employer stock comes from an annual employer contribution to the ESOP allocated to employees in proportion to their compensation. Below are factors to consider when funding repurchase obligations with employer contributions.

Every ESOP is Unique
The timing of each company’s retirement bubble varies. A company that is growing quickly now may be decades away from its retirement bubble. For a small employer, the bubble may be one key employee with a large account.

An ESOP plan sponsor needs to plan ahead for its own bubble. If an ESOP isn’t prepared for distributions, the plan sponsor may face fluctuating contribution levels, or even an inability to make contributions. Furthermore, a company may find itself exceeding the IRS’s limit of 25 percent of eligible payroll that is imposed on annual retirement plan contributions.

Find Your Bubble
To determine if you have a bubble approaching for your ESOP, you can conduct a distribution projection or repurchase obligation study, which projects the distributions and associated cash requirements that an ESOP will face in future years.

The timing and scale of a company’s repurchase obligation study depends on a number of factors, including the available budget and number of employees. Simple distribution projection studies with limited assumptions may suffice for smaller ESOPs. Regardless of a study’s complexity, the projected results are based on assumptions. Actual distributions will deviate from projected distributions, so projections will need to be updated periodically.

Planning For Your Bubble
Companies concerned with future repurchase obligations should review the ESOP’s distribution policies. ESOPs may delay starting payments for five years for employees who terminate employment prior to retirement, disability, or death, as defined by the plan. Distributions also may be payable as installments over five years, rather than as a lump sum distribution.

A plan sponsor that identifies a retirement bubble coming up in 5 to 10 years in its ESOP will need to determine if the current employer contribution levels will be sustainable through the bubble. If not, the organization should consider increasing its contributions now to build up a reserve and maintain a consistent benefit.

Consider a company that currently has to contribute three percent of payroll to pay out distributions, but does a projection that reveals it will have to contribute 15 percent of payroll during an upcoming retirement bubble. If the annual contribution is increased now, a cushion will be created that can reduce the potential 15 percent bubble-level contribution to a more affordable level.

Finally, as the non-employer stock assets accumulate, companies should review how these assets should be invested.


Trevor S. Bare, FSA, is a consulting actuary for Conrad Siegel Actuaries. He specializes in retirement plan consulting and administrative services for defined contribution and defined benefit plans, such as 401(k), Profit Sharing, Cash Balance, and Employee Stock Ownership Plans. He also specializes in nondiscrimination testing and tax shelter plan designs.

September Success

Something impressive happens in the month of September: Members of the House of Representatives flock to add their names to the latest pro-ESOP bill.

It happened last year, when 20 House members opted to sponsor HR 2096. And it is happening again this year: In the first 12 days of September this year (an election year, when representatives are most keenly attuned to constituents) already eight House members have decided to sponsor the bill.

What makes September so special?

You do.

Congress typically adjourns in the late summer, and its members head home—where many ESOP companies are waiting to host them on pre-arranged visits. In those visits, members of Congress get to see for themselves what makes ESOP companies unique. They get to see how involved and engaged employee owners are. They get to see the spirit of employee ownership for themselves.

When you host your members of Congress, they remember. For the past four decades, they have been telling us how profoundly those visits affect them.

And then they come back to Congress and sign on to the latest pro-ESOP bill.

They don’t do it because they have been flooded with e-mails, all generated by the same online program. And they don’t do it because a high-powered lobbyist in a finely tailored suit treated them to a fancy steak dinner in a dimly lit power-broker restaurant.

They do it because they have seen that special quality present in you, your employee owners, and your businesses. And—like us—they want to see more of it in America.

The Beat Goes On

Rob Zicaro Rob Zicaro just might be the embodiment of the ESOP movement. A professional drummer who became a machine operator and frontline manager at Web Industries, Zicaro once was invited to share insights on employee ownership with President Bill Clinton.

Zicaro retired from Web Industries last December, and has now returned to his first love—music. But he continues to speak about employee ownership, as he did at The ESOP Association’s Annual Conference in May. For Zicaro, music and employee ownership are an intertwined refrain that runs through his personal and professional lives.

A Drummer Is Born

Zicaro’s started drumming in his early teens, and at 14 joined a rock band run by his older brother’s friend. In the early 70’s, that band morphed into a new group named Mad Angel, landed multiple recording contracts, and frequently opened for fellow Boston-area band Aerosmith.

A striking aspect of Mad Angel is how it was organized: The band was incorporated as MA Associates Inc. All four band members got an equal 20 percent share, and the remaining 20 percent was divvied up among the road crew.

Was it like a rudimentary ESOP? “It really was,” says Zicaro. “Everyone had a stake in the outcome.”

Because MA Associates was formed before ESOPs were formally established as a retirement plan under the 1974 Employee Retirement Income Security Act, Zicaro’s experience with employee ownership predates that of many companies.

Ultimately Mad Angel split up, and after working in and managing a top 40 band, Zicaro decided to get a “real job” at a small converting company. It was there that a friend told him about Web Industries and employee ownership. It was music to his ears.

Meet Charles Edmunson

Zicaro was hired at Web, where he trained as a machine operator and met Charles Edmunson, the VP of manufacturing. Edmunson demonstrated a vital quality any musician—especially one with a bent for employee ownership—could respect: He listened.

“Charles brought donuts and bagels every Friday to the shop floor,” says Zicaro. “He was building relationships, listening to people. He really was in touch with the front lines and never lost that.”

Edmunson became a mentor to Zicaro, teaching him about ESOPs and bringing him to ESOP Association conferences. Zicaro and Edmunson formed quite a team, traveling together to give presentations on employee ownership. Zicaro couldn’t know it at the time, but he was auditioning for the biggest performance of his life.

A Lucky Series of Events

After years of unsuccessful attempts, Web Industries landed a visit from Senator Edward Kennedy. He met Zicaro and was so impressed he asked Zicaro and Edmunson to provide testimony about employee ownership and ESOPs at a Senate hearing.

Treasury Secretary Robert Reich heard their comments, and invited Zicaro to attend the Conference on the Future of the American Workforce along with President Bill Clinton.

In the span of a few weeks, Zicaro went from being an unknown machine operator to the person hand-picked to represent employee ownership to the President of the United States.

Zicaro’s comments at the conference were captured on video and still are available today. (You can see an excerpt here.)

His comments were not scripted. As only a good musician can, he improvised. “Charles would always say: ‘Just speak to what you know and how you feel,’” recalls Zicaro.

The opportunity to provide information to a sitting President may seem like sheer luck, but it wasn’t. Zicaro was ready for the moment, having invested energy ahead of time to better understand employee ownership, management, and business. He practiced when no one was there to see. And when the opportunity arose to be on the biggest stage imaginable, he was ready to riff on the material he already knew so well.

“Because I had read so much about employee ownership, thought so much about it, talked so much about it with my fellow employee owners and with Charles, I already had the content and the beliefs inside me,” says Zicaro.

What Next?

Today, more than 20 years after his meeting with President Clinton, Zicaro still demonstrates a passion for employee ownership—and music. He has an in-home studio where he writes and produces original songs for the top 40 market. And he continues to speak and advocate for ESOPs and employee ownership.

He wants to give back. He knows the work is not done. “Employee ownership is a journey,” he says. “You’re never done. There’s going to be an employee owner somewhere who has a conversation with a President. It may be in public or it may be in private.

“But,” he says laughing, “it’s probably not going to be me.”

Who will it be? And will that person be ready?

Spurring Employee Ownership

You usually know what to expect at the annual meeting of the Beyster Symposium—the annual gathering of top employee ownership researchers, including the five Louis O. Kelso Fellows funded annually by the Employee Ownership Foundation.

But this year’s event, which was held this week, included a surprise guest who drew an enthusiastic audience despite readily admitting he is neither an expert on employee ownership nor a researcher. He is Michael Gonda, VP of Communications for Chobani. The maker of Greek yogurt made headlines recently when it announced it would award 10 percent of the company to employees via Chobani Shares, which become active in the event of an IPO or sale.

Gonda said one reason the company announced the move is to encourage other businesses to consider employee ownership. He credited the company’s founder, Hamdi Ulukaya, for enduring a two-year process during which numerous legal advisers claimed there was no practical way for the business to share ownership among its roughly 2,000 employees. But Ulukaya was dedicated to the idea of sharing the wealth with employees, so a way was found.

Gonda notes that the approach taken by Chobani may not be readily applicable to other businesses, but that it does work for the company, which faces certain limitations because it is an LLC.

While other firms must find their own way, Chobani wants to help by spurring greater interest in and support of employee ownership. He added that the company is happy to partner with others to help promote employee ownership—a statement that seemed to generate enthusiasm among the researchers in attendance.

When asked about communications lessons the company learned, Gonda said the firm conducted a detailed analysis of the questions employees might ask, and prepared extensively to address those queries. At the announcement meeting, Ulukaya shared extensive information about the current and projected state of the business with employees. Chobani also set up e-mail and phone hotlines for employees who wanted to ask questions confidentially.

Although Chobani employees are not yet owners, one attendee asked if the company had seen any difference in attitudes to date. Gonda replied that the announcement had “an immediate impact.” Shortly after it was made, he said, an employee accidentally dropped the mop he was using. “Hey,” a nearby co-worker exclaimed, “don’t do that to my mop.”

ESOPs: More Than a Retirement Plan

Technically speaking, an ESOP is a retirement plan—nothing more, nothing less. But at some companies—like King Arthur Flour, winner of The ESOP Association 2016 ESOP Company of the Year Award—it is more. Much more.

“It is such a missed opportunity if an ESOP is only a retirement plan,” says Suzanne McDowell, King Arthur’s Chief Human Resource Officer and one of the company’s three co-CEOs. “It is so much more significant to invite people to the table to participate in creating an organization we are all really proud of.”

McDowell admits that when she joined the company 15 years ago, she didn’t immediately understand the full value of the ESOP. And then she saw something that showed her the depth of pride and connection employee owners feel at King Arthur.

Packing a Box
During the busy holiday season, the entire staff lends a hand packing boxes and shipping orders to customers. McDowell was doing her part when she couldn’t help but notice an employee owner nearby.

“The level of excellence she brought to packing this box was just astounding,” recalls McDowell. “She took such care with our product and its presentation. And when I asked her about it, she said ‘Of course I’m going to invest this kind of energy. I’m the last person who is going to touch this box before it shows up on our customer’s doorstep.’

“And that,” says McDowell, “is when I realized the ESOP program here at King Arthur is really something special. And I feel very grateful to be part of an organization like this.”

Adds Ralph Carlton, Chief Financial Officer and co-CEO: “Everyone comes to work feeling it is their company, and that leads to an attitude about work that is just magic.”

A Natural Extension
Before the company started its ESOP in 1996, it was already practicing open book management and enjoying an inclusive style.

“Becoming an ESOP was a natural extension of how the family had run the business for five generations,” says Karen Colberg, Chief Brand Officer and co-CEO.

The company makes it clear that while employee ownership offers benefits, it also comes with responsibilities. All three co-CEOs actively look for feedback—and get it. And that, in turn, means they have a responsibility to communicate clearly and regularly.

“So many people show up with so many good ideas,” says Colberg. “We can’t do them all. You have to pick your path. So we talk a lot about our goals, our performance, what decisions we are making, and why we are making them. We want people to understand the trade-offs involved, because we have to make decisions with the goal in mind of keeping this business and this ESOP running for another 200 years.”

Connecting with Customers
An added benefit of its ESOP is that King Arthur Flour enjoys two additional ways to connect with customers.

The first is direct: Engaged employee owners who work in customer facing positions routinely report back on the feedback and suggestions they hear. That information enables the company to respond quickly to changing customer needs and desires.

The second is more indirect: King Arthur connects with customers by letting them know—at every opportunity—the company is employee owned. They excel so much in this area that they won an AACE this year in the category of Ownership Marketing.

“I think consumers are pleased to know that King Arthur Flour is 100 percent employee owned, and is about empowering everyone in the organization,” says Colberg. “It says we care about our employees, the community they are in, and the longevity of our enterprise.”

Adds Carlton: “We didn’t become an ESOP to realize a consumer benefit. But there is a clear trend out there towards consumers asking not just about your product, but who it is coming from. That is a great opportunity for us to talk about the fact we are owned by our employees, that we are a B Corp. That might not have mattered 10 or 15 years ago. It increasingly matters to consumers today.”

Parting Thoughts
King Arthur has enjoyed tremendous growth and financial success since becoming an ESOP. It may be coincidence, but the growth is real.

Says Colberg: “Wealth creation comes from people managing the organization and themselves as owners. We don’t talk about it every day. It’s intangible, but it is pervasive.”

But when asked what advice they would offer to businesses thinking of starting an ESOP, King Arthur’s triumvirate of CEOs returns to culture and leadership, not money.

“Recognize that an ESOP happens to be a financial transaction, but first and foremost it is a cultural transition,” says Carlton, King Arthur Flour’s CFO. “It’s a very, very exciting way to govern, to lead, and to build a business. Oh, and by the way, it happens to be a retirement plan.”

Everything You Think You Know Is Wrong

Okay, so we exaggerated a bit in the title. Not everything you know about everything is wrong, but certainly several things you think you know about The ESOP Association’s Annual Conference are wrong.

For example:

You don’t know where this year’s Annual Conference is being held. Sure, you’ve been to the Annual Conference before, and it is always at the same hotel.

Except for this year! The conference will be at the JW Marriott Washington DC.

You don’t how to get there by Metro. Or, at least, you might not know how to get there by Metro. One TEA staffer, who is a native of the DC area and whom we’ll just call “Patrick”—got off the Metro train and walked into the nearest Marriott, blissfully unaware he’d walked into the wrong hotel.

And it’s conceivable you could make the same mistake. Why?

The station closest to the JW Marriott Washington DC is Metro Center, and when you exit that station you might immediately see a sign for a different Marriott hotel—the aptly named Marriott Metro Center.

You can visit that hotel if you like. You can even wait in the lobby for half an hour before you realize you are in the wrong place. (Not that we know anyone who did that.) But if you do, you’ll miss all of the sights and sounds of the Annual Conference, which is only a few blocks away.

There is never a photo booth at the Annual Conference. Wrong again! This year, for the first time, the Annual Conference will feature a photo booth where you can pose for a picture with your new-found ESOP friends and in front of a backdrop featuring the Capitol. No need to bring your selfie stick or stretch your arms to their limits: A photo booth operator will be on site.


Take your photo in front of the Capitol, without leaving the hotel. 

You really don’t know how to use an elevator. After years of absentmindedly pushing elevator buttons and having them do exactly what you want, the elevators at the JW Marriott Washington DC (remember that name?) will challenge your alertness.

In most elevators, you push an “Up” or “Down” button outside the elevator; once inside, you push a button for the floor you want to visit.

That’s not how it works at the JW Marriott Washington DC. There, you select the floor you want to visit by pushing a button outside the elevator. A sign then tells you which elevator (for example, elevator D) will take you to that floor, and you go that elevator.


What are these buttons doing outside the elevator?

Think of it this way: The new elevators are more like riding in a cab (which takes you to the destination of your choosing) than a bus (which makes every stop).

Once inside the elevator, there’s nary a button in sight. And even the digital counter that tells you what floor you are on is in a different spot—on the side of the elevator where the doors slide open.

You never thought you could see so much text devoted to pushing an elevator button, did you? Neither did we.