The Ultimate Employee Buy-in

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Stone Construction Equipment, a $55 million company that has watched competitors move production operations offshore, but itself runs a profitable, growing manufacturing operation out of a sprawling factory in Honeoye, N.Y. Stone's 240 employee-owners can deliver a customized, built-to-order piece of equipment in a few days or less--a level of performance unmatched in the industry.

Having just co-authored a book about such companies, I can testify: These three aren't unique. What unites them and the many others in this high-performing club is that their leaders take the ESOP seriously, spend enormous amounts of time reinforcing the idea of employee ownership, and go to great lengths to encourage employee involvement and innovation. As at CPES, employees return the favor. A Stone team came up with the idea of mounting the tires on cement mixers after the mixers were painted rather than before, shaving six minutes off an extremely tight production schedule. A McKay hourly worker figured out how to reduce the labor required for drainage trenches, saving the company $10,000 a year. "Some of the ideas that get suggested are just phenomenal," says McKay chief financial officer Tim Jonas.

But make no mistake: It can be a long, hard slog from the moment of creation to that kind of business nirvana. Employee ownership is still a weird notion to most Americans. Sell the company to an outsider, sell it to management, pass it along to your kids--in all those situations, everybody knows who's in charge and what's supposed to happen. But selling to the employees? Will the inmates be running the asylum?

The legalities are clear and reassuring to nervous managers. The business runs as usual, with the CEO and the board in charge. The ESOP shares' votes are in the hands of a trustee, who is appointed by the board, just like the CEO. What's not so clear are people's expectations, fed as they always are by hope and fear. Managers who hear that the ESOP is part of an exit strategy may wonder what opportunities will be open to them when the owner departs--not to mention wondering when the hell that is going to be. Employees who are suddenly told they are owners may believe they're now entitled to run things.

One key to success is educating employees about what it means to be an owner. Yes, you will benefit in a major way if the company makes money and grows; here's how. No, you don't get to tell your boss what to do, and no, you aren't automatically entitled to know what she makes.

A second key: making sure that the CEO or his successor is up to the peculiar challenges of running an ESOP. Some ESOPs fail, if that's the right word, not because an ESOP company is any more likely to go belly-up than its non-ESOP counterparts. They fail because a selling owner can't let go, or because new managers don't draw enough benefit from employee ownership by pursuing a participatory management style. In both cases, employees decide that nothing has really changed, so they might as well go back to doing things the old way.

The bugbear of ESOP critics is the fact that employees are also shareholders. Can they be fired? What if the CEO needs to do a layoff or reorganize a department out of existence? The short answer--that he or she has the right to do any such thing, and must redeem only the stock held by departing employees--is true, but it doesn't quite tell the whole story. Successful ESOP companies do treat employees differently, and may indeed find it harder than conventional companies to make "tough employment decisions," as Harvard's William Sahlman puts it. When one ESOP company laid off about 15% of its 150-person work force a few years ago, a worker described it as being like a death in the family.

But there's another dimension that critics overlook, which is that employee-owners can be counted on to go the extra mile to avoid layoffs. Gardener's Supply, a $60 million company based in Burlington, Vt., and partially owned by an ESOP, faced a slow time in 2003. Cindy Turcot, chief operating officer, challenged line employees to reduce expenses. Workers came up with a host of initiatives adding up to $500,000 in savings, a boost to the bottom line that also helped the company avoid layoffs.

Researchers Joseph Blasi and Douglas Kruse of Rutgers University have compared ESOP companies with non-ESOP counterparts in several studies of their own and have reviewed other researchers' work in detail. Their conclusions: ESOPs are indeed associated with greater stability of employment, as the critics might suggest. However, ESOPs are also typically associated with higher productivity, faster job growth, and higher survival rates among companies.

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