The magic ingredient for creating a successful ESOP

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ESOPs, participative management

Employee ownership works. It makes companies, on average, better, faster, and stronger. The typical employee-owner stays with his or her company longer, and many of them come up with the kinds of creative ideas that can push expenses lower than managers thought possible, or that open up new lines of business. Overall, the statistics show that, on average, everyone comes out ahead with employee ownership.

Not surprisingly, some companies do far better than their peers, and some employee-owned businesses do not get any performance benefit at all, or may even do worse. 

What separates the companies that outperform from the ones that underperform?

A successful ESOP requires open communication. The Plan itself creates the conditions for company success, however strong communication and participation make the plan successful long-term in order to experience the benefits everyone expects. 

Employee ownership

Studies have shown that participative ESOPs that are fully and clearly communicated enhance employee engagement (rather than their desire to control the company) leading to high productivity, increased profits, and increased wealth for all. 

If people are going to think and act like owners, they need a basic level of understanding of the plan through which they have that ownership. Here are some of the methods our clients have used to communicate an understanding of their ESOP to their employee-owners.

Hold meetings: Bring everyone together in large groups to announce the ESOP and to cover some of the most common questions about the plan. Do not go into great detail just yet. 

Set up a peer-to-peer training group to further communicate the ESOP in small groups. People can be elected or invited to join a training group and given the time and resources to create a training program. The most successful groups have the active support of the CFO, who can make sure that they have accurate information and can answer all of the group’s questions. These communication groups may even talk with similar committees at other companies so they can share PowerPoint slides, handouts, and agenda items.

Have written materials: Provide information about the ESOP in written format for the people who need to see things in black and white. Employees’ spouses can read them as well.

Let the ESOP sell itself: Most employee ownership plans are good deals for the employees. If they trust the information they receive, rather than suspecting it of being sugar-coating or emphasizing only the positive, they will likely come to their own conclusion that the plan is a good thing. 

Target “just in time” information: People learn best when the learning is digestible and repeated. Young employees who have just joined the company do not need to know all the details about the timeline on which they will be paid out when they leave the company, but they probably do want to know the eligibility rules.

Share stories: Not much is as persuasive to human beings as stories. Talk about people who have retired from your company with substantial value in their ESOP accounts, or, if your plan is newer, use examples from other employee-owned companies. Tell the story of why your company became employee-owned. What were the other options? Why did the company choose employee-ownership over those other options?

Use statistics: Some people prefer to see the numbers, so don’t hesitate to show them research—but only the highlights– on the implications of employee ownership for employee-owners, your company and ultimately the community. Good sources of data, even though most are from American companies, are the National Center for Employee Ownership (NCEO), the ESOP Association (US) and the ESOP Association Canada.

Every new ESOP requires Participation to be successful

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As ESOP Experts we write about participation a lot when it comes to ESOPs. Our whole design and implementation methodology is based around a participative approach, and that’s no coincidence. But what does participation look like? Does it always mean representation on the Board of Directors?

Where a goal of the ESOP is an overhaul or integration of the company’s corporate culture, a significant factor could be whether or not employee-owners should have a right to representation on the board of directors. In a unionized company the unions usually require that representation, if they are to look at an ESOP as a means of supplementing wage concessions. Because ESOPs are put into place as a means to allow employees to participate in the value growth of the company, there is a tendency to develop the right of the employee-owners to representation on the board of directors. This is generally done over time as the shares owned by employees becomes about 40% or greater. Studies in the United States have shown that a majority of companies, after five or six years of operating the ESOP, tend to appoint employees to the board, as all stakeholders begin to understand and respect the issues that are involved in running the corporation, and trust each other to do what is best for the growth of the company.

One of our clients decided that board representation was important to their company culture. They decided that one board member would come from among the employee-owners and would have a term of three years. To select this board member, the employee-owners voted for one of three candidates chosen by the founding owners. 

A successful ESOP is flexible and adapts with the changing needs of the growing company. In this way the level of participation can change as the plan grows and employee-owners show greater understanding of what is involved in running an organization.

By Joanna Phillips, CHRL, CVB, Vice President, and Perry Phillips CPA, CA, CBV, President