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.”

You Can’t Love What You Don’t Understand

It’s hard to appreciate something you can’t understand. Carl Morgan—The ESOP Association’s 2017 Employee Owner of the Year—knows that firsthand.

In 2001, Carl was working for a construction company that was purchased by Emery Sapp & Sons. Suddenly, he was part of a new company, with a new culture, and an odd benefit called…an ESOP?

Initially, he didn’t understand the ESOP, and neither did those around him. That confusion bred skepticism. “We’re going to get money, with no strings attached?” they wondered. “Sure we are.”

Nothing had prepared them for this kind of experience.

As a supervisor, Carl gave his crews any company information at his disposal. He also sent feedback up the line, saying more and better information were needed.

Carl couldn’t have known it then, but he would be intimately involved in providing that information and education to his fellow employee owners.

Starting the Journey

When he joined ESS, Carl says today, the company was in its ESOP infancy. And like many new ESOP companies struggling with strange technical and financial requirements, focusing on culture and communication weren’t high priorities.

That changed in 2011. With the ESOP note paid off, the company started an ESOP Journey Committee to help new and existing employees better understand the company, the ESOP, and the culture.

Since Carl had shown an interest in better ESOP communication, he was asked to become an inaugural member. Only Carl remains from the original group.

Along the way, Carl has demonstrated a passion for helping employee owners understand the ESOP, and the culture required for the ESOP to fulfill its potential. Drawing from his own experiences, he has spearheaded efforts to tell the ESOP culture story in clear, unmistakable terms that all can understand.

He developed an ESOP 101 lecture that he gives to new employee owners and that has been well received. Each session includes 30 minutes of material and a 15-20 minute question-and-answer period.

The flexible format enables participants to get help with any issues they find confusing. “Each question-and-answer sessions is completely different,” says Carl.

Another early effort was the Straight Talk Guide, an easy-to-understand pamphlet that helped new employees grasp ESOP basics. It also explained the role of the ESOP Journey Committee, and included contact information for each member.

Carl developed another talk that explains how living the ESOP culture—caring about your own job and contributing to the organization overall—is vital to the success of the company and the ESOP.

Later ESOP communication efforts became increasingly sophisticated.

A “What’s in your wallet?” campaign was launched at a special meeting, where employee owners received a wallet-sized card listing the number of shares they owned. The cards generated unexpected excitement and interaction. Younger employees were amazed, saying to one another, “Look how much I have in my account!”

“That little card was an eye opener for us,” says Carl, who adds that stock information had been sent to employees’ homes, but didn’t seem to have the same effect. And what effect did this initiative have on Carl? “It was one of the neatest moments I’ve had” in ESOP communications, he says.

The ESOP Journey Committee also found a creative way to organize ESOP information. Realizing there were four stages in an employee owners’ ESOP experience (new hire, vested, mid-career, nearing retirement), they organized online content into those categories. The approach makes it easier for employees to find and digest information most relevant to them.

The idea was highlighted by the judges for the 2017 Annual Awards for Communication Excellence as a Bright Idea other ESOP companies might emulate.

Carl’s ESOP journey extends beyond Emery Sapp & Sons. He has shared his ESOP experiences with elected officials on Capitol Hill, and speaks to newer ESOP companies about culture and communication.

Understanding Leads to Results

What advice would Carl give to those starting in ESOP communication today? Explaining how the ESOP works is key, he says. When employees can’t understand the basics, they become skeptical.

Once they understand the ESOP, and the culture that goes with it, great things can happen.

Carl points out that from 1999-2009, Emery Sapp didn’t focus much on culture. The stock price rose. “But, after we started this education process,” says Carl, “our stock has gone up vertically” and at a time when “some pretty good construction companies were going out of business.”

Culture, says Carl, “is 90 percent of the reason our stock price is what it is today.”

Jobs Staying in Rusk, Wisconsin

For 54 years, Artisans served as more than just an apparel company. It was an important source of jobs for Rusk County in northern Wisconsin.

But nothing lasts forever, and when the owners—Gordon and Bev Dukerschein—were ready to retire the community faced the prospect of losing the business and its 72 jobs.

Now, thanks to a loan from the Wisconsin Economic Development Corporation (WEDC), the company will remain in business…as an ESOP.

“Without WEDC’s loan, Rusk County was facing the potential risk of losing a major employer,” said Michael Wright, chairman and CEO of the company. “ESOPs are one of the few structures that allow employees, especially in rural areas, to participate fully in the generation of wealth that can sustain communities.”

It is a situation that plays out all over the nation as Baby Boomers consider retiring from the businesses they have owned, in some cases for many years.

And it is a situation for which ESOPs are ideally suited.

The business owner finds a seller who knows and cares about the businesses—more than any outsider ever could.

Customers experience a smooth transition and ongoing service from the same people they have dealt with in the past.

The community gets an owner that cares about keeping jobs right where they are.

And the employees—who often helped build the business—get to share in the rewards.

“Our employees now have the chance to secure a future in the community they love and support,” said Charlie O’Mahoney, president of Artisans.

What’s not to like about that?

Getting it Right

By Shawn Moody, Founder, Moody’s Collision Centers

In 1977, I started Moody’s Body Shop at the age of 17. I was a small business owner, taxpayer, and mortgage holder before I was old enough to vote. Fortunately, I found my passion young!

When the “junkyard” adjacent to Moody’s came up for sale in 1988, we jumped at the chance to acquire its 35 acres of land. Our goal was to clean up the mess and market the property for future development.

But we found out we were equally passionate about the “junk” business, and over the next four years we transformed what could have been a Superfund site into one of the leading auto recyclers in America.

Our efforts were noticed. In 1994, the Automotive Recyclers Association gave us their highest award, for Environmental and Operational Excellence. We were one of only six recyclers in the country to be so honored.

In 1998, a newly formed company named LKQ Corp. began acquiring leading auto recyclers, and they came knocking on our door. So did the Ford Motor Co., which also decided to get into the auto recycling business.

After an intense courtship from both companies, we decided to go with LKQ Corp. We sold them our auto recycling business, and leased them the land and buildings. We also retained Moody’s, which was a single shop that we had grown to 10,000 square foot facility with 10 co-workers.

I stayed with LKQ Corp. for about 18 months, working on a business improvement team. We went all over the country, working with newly acquired sites. I would recruit former owners like myself and we would spend three or four days analyzing their operations and developing a business plan to improve operations and systems, all while integrating LKQ’s best practices.

When I returned to Moody’s, we were focused on growing the collision repair business with the capital and experience we had gained from the LKQ deal.

But as Moody’s grew, the aftermath of our transaction settled in: I realized that while the sale to LKQ was a financial windfall for me and my family, it didn’t provide the same financial benefits to the co-workers who had helped build such a high performing company.

In 2002, I was standing in the lobby of Sebago Technics awaiting a set of blueprints, when I noticed a photo on the wall. The photo captured Sebago’s co-workers, and in the corner it had the inscription “Employee Owned.”

It struck me this could be a way to structure Moody’s so that all our co-workers would have an opportunity to build equity through their hard work and dedication.

I reached out to Walt and Ellen Stinson, the founders of Sebago, and they helped guide us through the complex process of starting an ESOP. The first few years I contributed stock to our co-workers and began the journey of transitioning ownership to them.

Since then, we have grown the company, together. In 2001 we had 10 co-workers in one location. Today, we have 170 co-worker owners and 11 locations. Our ESOP trust holds 34 percent ownership and is worth more than $8 million. The stock has appreciated an average of 18 percent per year since the ESOP’s inception in 2003.

The development of our ESOP, and our overall success, is due to a lot of help from a lot of wonderful people within the ESOP community, such as Rob Edwards (retired Steiker, Fisher, Edwards), Donna Isherwood (Angell Pension), Brady Phinney (Atlantic Management), Michael Keeling (ESOP Association), and especially the hard work and dedication of each and every co-worker owner at Moody’s.

When we sold our first company, I didn’t fully realize the positive impact we could have on our co-workers lives.

It’s gratifying to be able to learn from life’s experiences. It’s gratifying to have another opportunity to “get it right.” And now we know the right way to redistribute wealth—the capitalist way that enables people to earn it!

ESOPs: A Truly American Invention

The ESOP model we know is unique, and exists only in the United States. Perhaps that is no accident, since concepts that are intrinsic to employee ownership—such as economic fairness, and providing business opportunities for those who will work for them—have been evident in American economic thinking since before the Revolutionary War.

Here are some lessons from the nation’s early history that continue to relate to ESOPs and employee ownership today.

Broad Support

As professors Joseph Blasi and Douglas Kruse point out in The Citizen’s Share, one of the American government’s earliest legislative actions was providing a tax break to help rebuild New England’s cod fishing industry, which had been decimated by the Revolutionary War.

But, there was a catch: The federal assistance would be available only if employees shared in the profits.

Three Revolutionary leaders agreed on this financial assistance and the requirement that employees share in the benefits: George Washington, Thomas Jefferson, and Alexander Hamilton.

Jefferson and Hamilton were political adversaries who held very different views on the nation’s economy. Yet the fundamental concept of economic fairness—one central to the Revolution itself—was powerful enough to cause them to join forces.

That tradition continues today: Pro-ESOP legislation before Congress is sponsored by Democrats, Republicans, and Independents. And thought leaders representing the left, right, and center all have publicly stated their support for employee ownership and ESOPs.

Lending Capital

Where Washington, Hamilton, and Jefferson used the nation’s money to support employee ownership, Ben Franklin used his own.

Franklin was the elder statesmen among Revolutionary leaders, and by the time the war had started he had already launched and sold his successful printing business. But Franklin didn’t start out as a successful business leader. Like many young men of his day, Franklin learned his trade by serving as an apprentice—which was akin to signing an utterly lopsided non-compete agreement.

The apprentice learned his master’s trade, and was given food, lodging, and clothing. In exchange, though, he signed a contract pledging to keep his master’s trade secrets and to work for up to seven years without pay. The master could even control the apprentice’s non-work hours. For example, in one contract of the colonial era, the apprentice was not allowed to buy or sell goods without his master’s permission, and was not allowed to marry until the apprenticeship had ended.

Once an apprentice had served his term, he could work as a journeyman at any shop where he could land a job. But he still had an uphill battle to becoming an owner. A huge obstacle—then, as it is now—was a lack of capital. This was especially true for the printing business in Franklin’s day because the necessary printing equipment had to be imported from England.

Saving money on a journeyman’s salary could be challenging, but Franklin relied on his keen intellect, diligent work ethic, and frugal lifestyle to get ahead.

But even these were not enough: In the end, Franklin was able to open his own shop at an early age because others helped him obtain the seed money he needed.

As Franklin became more successful, he in turn helped his employees set up their own businesses. In 1733, he sent one of his journeyman employees to the city of Charleston, South Carolina, which needed a printer. Franklin paid the upfront capital costs for the business, buying the expensive press and type. He also paid one third of the expenses. He took one third of the profits for six years, at which point the journeyman could purchase the equipment and run his own business.

The first time he tried this arrangement, it did not start well. The employee he sent to Charleston was not a good accountant, making it difficult for Franklin to keep tabs on the business. When the employee died, his wife took over. She provided Franklin with accurate and timely payments and accounting, and managed the business successfully. At the end of the term, she purchased the printing house from Franklin and installed her son in the business.

Despite the early troubles with this first agreement, Franklin went on to establish his best workmen in similar arrangements. As with his first effort, he incurred the upfront costs and enabled his employees to operate the business, earn a share of the profits, and eventually own the operation. “Most of them did well,” he wrote in his autobiography, “being enabled at the end of our term, six years, to purchase the types of me and go on working for themselves.”

Franklin’s actions are clearly similar to those of current day owners who enable their employees to buy the business. As in Franklin’s day, most employees lack the resources to make the upfront investment in a business. Today’s owners who start a leveraged ESOP are following Franklin’s lead, providing the capital needed to help employees buy the business, and enabling them to pay off the loan through their future efforts.

Gradual Retirement

In yet another way, Franklin resembled an owner who sells to an ESOP.

At the age of 41, Franklin retired from the daily operations of his printing business and turned it over to his new partner, David Hall, who had been his employee for four years. For 18 years Hall ran the shop, earned a share of the profits, and gave Franklin his share. At the end of that time, Hall purchased the business outright, with the money he made running Franklin’s operation.

Like many modern-day owners, Franklin transitioned out of the business over time. Like many good ESOP companies, he had a succession plan in place. And, as he had done before, Franklin gave one of his employees—not an outsider—the chance to be a business owner.

Falling in Love with Business Again

In a commentary for CNBC, Former New Hampshire Senator John Sununu penned a strong endorsement of employee ownership generally, and ESOPs specifically.

“Ownership in a business gives workers a physical stake in their company, allowing them to benefit directly from their own efforts, and particularly from improvements in competitiveness and performance,” Sununu wrote.

Sununu distinguishes between forms of compensation that don’t truly provide ownership, and those that offer a genuine piece of the pie.

“Ownership is not profit-sharing or bonuses,” he writes. “It’s a true stake in success, and employee stock ownership plans (ESOPs) stand out as a unique model that deliver benefits for both businesses and employees.”

Sununu cites recent research showing how ESOPs have fared well in tough economic times, and have often outperformed conventionally-owned businesses.

Americans used to be proud of their businesses, he states. And adds that: “ESOPs just might be enough to make Americans fall in love with business all over again.”