Think your company is too small for a formal employee stock ownership plan (ESOP)? Maybe not. Bruce Pinsky, presidentof Packaging Consultants, in New Bedford, Mass., started an ESOP when the company had only six employees. When hispartner died suddenly in 1989, Pinsky persuaded the estate to sell the partner's shares to the company's newly created ESOP.The ESOP option was financially beneficial to the heirs, and Pinsky thought the ESOP would rally his six employees, whowere shaken by the death. It would "put our future in our own hands," he says.
Pinsky retained 51% of the stock; the rest went into what's called an ESOP trust. The trust, Pinsky explains, holds the stockand allocates it to employees' accounts, where it vests over time. When a fully vested employee retires, the employee'sshares are bought back by the company. What's more, Pinsky says, when the company buys back a retiring employee's stock,that employee can roll the proceeds into an individual retirement account (IRA) without paying taxes. "It's a very powerfulwealth tool" for employees, he says.
Pinsky is sold on the motivational effects of his ESOP. "A lot of younger CEOs aren't fully aware that it can get lonelyrunning a business," says Pinsky, who turned 44 in 1999. "You're vulnerable to employees' coming and going, which hurtsyour ability to grow." The ESOP ties employees to the company and encourages them to "work and live their lives as if theywere owners." Since 1990, the company, which designs and sells packaging, has experienced sales growth of 117%, andPinsky's current staff of 12 has accumulated significant wealth as the stock has appreciated in value.
The trade-off is that Pinsky gave up equity in his company. But, he stresses, "if it were just me against the world, trying tomanage people conventionally, we never would have achieved that growth.
"Owners rise to challenges better than employees, particularly in a small company," Pinsky notes. The ESOP has been astrong incentive, he says, by improving employee loyalty during difficult times.
That improved loyalty doesn't come automatically, however. "You have to work at it," Pinsky emphasizes. "You have tocontinue to educate and remind" employees about the ESOP's benefits. The best kind of reminder? "We had our first ESOPowner retire," Pinsky says, and that meant employees got to witness a colleague reaping the benefits of her stock ownership."She is a living example of what happens at retirement."
Are you interested in ESOPs? While he was exploring the ESOP option, Pinsky says he consulted his lawyer, his accountant,his pension actuary, and the National Center for Employee Ownership, in Oakland, Calif. (510-272-9461, orwww.nceo.org).