Getting The Most Out Of An Esop
Every time I put a hammer to a nail, I tell myself, 'Do it right, now. Be sure of what you're doing, because everything you do comes back to you.' The cabinetmaker pauses to let his words take effect. "What I do matters, because I own this company. We all own it. So when we do a good job, the company gets a lot of business and makes a profit. And when the company makes a profit, so do we."
His name is James "Face" Lucas, and he is proof that employee ownership can do wonders to motivate workers. Lucas pounds nails for Maximum Building Corp., a subsidiary of Maximum Industries Inc., of Williamson, W. Va. The company constructs mining facilities in the coal fields of Appalachia. A year after Maximum instituted its employee stock ownership plan (ESOP), productivity is up, turnover is down, and in Lucas's words, "we all just pull together more than we did before."
But all is not so team-spirited at another employee-owned corporation, a consulting firm in Washington, D.C. "This stuff is garbage," wrote one respondent to an ESOP-evaluation questionnaire. "You call this ownership? I'd call it nothing but a tax gimmick for the company. All You're doing is giving us stock. Big deal."
A small but growing number of companies are coming to the realization that an ESOP is not a motivational quick-fix. Gains in worker loyalty, productivity, and efficiency are possible, but they are by no means guaranteed. In fact, the establishment of an ESOP can backfire, spawning as much worker dissatisfaction as the move was intended to eradicate. That happens, ESOP-watchers say, when the company fails to make its employees understand the plan or when it allows the employees to think the ESOP is something it is not.
An ESOP is a long-term employee benefit that has the potential to be as lucrative for the company as it is for the employees. Calling it a tax gimmick stretches the point, but, the consulting-firm employee is right -- an ESOP has financial attributes that tend to make it more attractive to nany companies than a pension or profit-sharing plan would be. Like other benefit plans, contributions to an ESOP are tax deductible. But unlike the others, an ESOP trust fund can be established with a bank loan if desired -- and both the principal and interest are also deductible.
With an ESOP, you are not securing your employees' futures by investing in somebody else's company. Rather, you are investing in your own company and creating a market for your stock. In addition, most companies find they can comfortably make regular contributions to their ESOPs, because they don't have to weaken their cash position to do so. Newly issued stock is perfectly acceptable.
Best of all, a company can borrow with its ESOP. Since each company keeps control over its ESOP fund until employees become fully vested and eligible to cash in their stock, the fund can be a ready source of capital. Many corporations boast that they haven't had to approach a banker since inception of their ESOP.
All of this is enticing, but what sells most companies on employee ownership is the belief that an ESOP also pays off in higher productivity and profitability. While research to support that theory remains sketchy, it is encouraging. For example, 55% of the managers of ESOP companies polled by the ESOP Association, an information and lobbying organization in Washington, D.C., report "some" improvement in productivity, and another 15% report "strong" improvement. An earlier study at the University of Michigan, comparing 30 employee-owned corporations with their more traditionally operated competitors, concluded that the companies that were owned by employees were 1.5 times as profitable.
"There is definitely a connection between ESOPs and productivity, and ESOPs and profitability," says Corey Rosen executive director of the National Center for Employee Ownership, a private, nonprofit clearinghouse in Arlington, Va. "The studies we've got may be preliminary, but they do not conflict. What we don't know, however, is exactly how much of a relationship there is, or exactly why there is one." The center is one year into a three-year study that will attempt to fill in some of the blanks.
"The early results have been a big surprise for most companies," Rosen says. "We consistently find that managers perceive the ESOP to be working better than the workers perceive it to be working." For every Face Lucas who is inspired by his ESOP, there may be someone who is ambivalent or downright disenchanted with it.
Explanations for employees' mixed reviews vary among ESOP-watchers. But this much seems clear to most: Show them a company where the ESOp draws more yawns and raspberries than cheers, and they will show you a company where the workers don't feel like owners. Show them a company where the workers don't feel like owners, and they will show you a management that doesn't have enough faith in employee ownership to make it work -- or is reluctant to admit that a true transfer of ownership was never the goal in the first place.
"An ESOP can be one of the best ways of motivating people, but that potential can't be realized simply by putting in the plan," Rosen explains. "There's more to it than that. You have to really want to make the employees owners in every sense of the term. If you're not willing to do that, you probably shouldn't get into an ESOP. Things won't get any better."
You may actually make things worse, warns Norman Kurland, a lawyer and ESOP consultant in Arlington, Va. "If you tease people with ownership, your company may fly apart," he says. "People reach a certain level of equity -- a threshold of ownership -- and suddenly they realize that they have something to lose. That threshold may be 10%; it may be 15%. (The ESOP Association pegs the average employee equity in its member companies at 28.5% and rising.) When they reach that point, they start demanding accountability, and let's face it, most managers don't really want to be accountable to their employees."
Kurland further explains that workers, unlike their managers, expect the word "ownership" to be synonymous with "participation," and "if you try to bar your employees from participation, you're building up an opposition that wasn't there before you first said anything about ownership."
In other words, Rosen adds, "either give those employees a greater role in the company, or simply tell them 'This is not really ownership. This is a benefits plan for you and a tax break for the company.' " As a believer in employee ownership, Rosen would rather see the former than the latter. But he has no list of dos or don'ts for how to increase employee participation. "There are a lot of things being done, but you've really got to do whatever works for your company."
Giving workers a voice in operational decisions, and establishing cash-incentive plans -- perhaps by passing through ESOP dividends -- are two rare but effective ways of boosting the motivating potential of an ESOP. Many ESOP companies rely on more obvious methods of giving employees a feeling of participation. Faced with a ho-hum reaction from employees, some companies with new ESOPs have gone to great lengths to herald the first distribution of stock. "You'd be surprised how tickled somebody can get, just from having their picture in the paper," says one manager with a chuckle.
Most companies with productive ESOPs also boast of a commitment to what might be termed corporate town meetings, at which suggestions and grievances are aired. Some invest in elaborate education programs. For example, Southern Medical Services Inc., headquartered in Birmingham, Ala., has produced its own ESOP movie, at a cost of $5,000. Other companies have instituted poster contests or newsletters to thump the drum for the ESOP. And still others swear by psychological ploys such as drawing organizational charts upside down to emphasize the role of the employee-owner.
"All that stuff is fine," says Kurland, "but you shouldn't need a lot of flag-waving. All you need for a successful ESOP is an atmosphere in which everybody works together, thinking like owners."
Face Lucas agrees. "I have $1,400 worth of stock right now, and I know there'll be more where that came from," he says. "I'm set for life, I figure. So, as long as I have some say about my job, I'm happy. I'm an owner, and that's enough for me."