Consider 7 Cs When it Comes to ESOPs

PSMJ Resources, Inc.
Posted on: 06/19/20
Written by: PSMJ Resources, Inc.

Design firms looking to build competitive advantage— and reward employees in the process—may find what they need with an employee stock ownership plan.

ESOPs give employees ownership interest in the company, which can help with recruitment, retention, and alignment of individual performance with firm performance.

According to the nonprofit National Center for Ownership, approximately 6600 companies of all shapes and sizes, covering more than 14 million employees, have them.

“ESOPs pretty much lead to an egalitarian environment because everybody is getting a part of the rock—the ownership,” says Bob Jack, MBA, MS, author of Increasing Firm Competitive Advantage Through Use of an Employee Stock Ownership Plan.

These plans aren’t the right choice for every firm, however.

“In order for an ESOP to be successful,” Jack continues, “senior management has to be heavily invested in the total success of employee ownership, and the rewards must be substantial and visible to the employees.”

Ready to consider an ESOP for your firm? Consider these seven C’s:

1. Counsel. To know whether an ESOP is right for your firm, hiring a consultant is absolutely essential. Seek initial advice from someone experienced in ESOPs, particularly someone who can make a valuation after looking at your firm’s financial information, staff size, and a few other particulars. Jack suggests these potential consultant companies: Butcher Joseph & Co. based in St. Louis, and Houlihan Lokey and The Menke Group, both based in Los Angeles.

2. Culture. “It is vitally important for employees to have transparency at the top,” says Jack. Financial results, balance sheets, income statements, even salaries of top management are all data to help convey an impression of employee ownership and participation.

3. Communication. This has to involve management in a big way through frequent one-on-one and small group meetings, as well as an annual meeting. Letterhead should include the words “employee-owned.” And annual statements should show stock allocations and valuation amounts for individual accounts.

4. Conduct. Management must frequently promote the idea of employee ownership by supporting participative decision-making, and periodically and systematically providing employees a personal record of their ESOP accounts showing value and contributions.

Notes Jack: “Research has shown that employees are most concerned about how the financial benefits of the ESOP affects them personally, and so management should focus on that parameter of performance.”

5. Contributions. Management must identify distributions at retirement “as a reward of worker capitalism and employee ownership, not as a burdensome, negative cash flow to the company,” Jack advises.

6. Convenience. ESOPs come with some tremendous tax benefits. For example, all ESOP contributions are deductible for tax purposes, and banks that loan to 100 percent-owned ESOP companies only pay taxes on half the interest income they make.

7. Conflict. This happens when a number of employees reach retirement age at the same time, making the retirement distribution larger than usual. Sometimes there isn't enough revenue to cover that distribution—and money has to be borrowed. “There are periodic burdens, and you have to be able to sustain those,” says Jack.

Learn more about Increasing Firm Competitive Advantage Through Use of an Employee Stock Ownership Plan here. 

PSMJ's A/E Strategic Planning Study  is available for purchase or as a free download to PSMJ members.

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