Make Your ESOP Work for YOU
Congratulations. You’ve completed your paperwork, met the Department of Labor criteria and successfully established your employee stock ownership plan (it took a while, didn’t it?).
You’re now half the way there. In order to perform better and reap the clear benefits an ESOP can generate, you must couple employee ownership with employee engagement.
It starts with you. Research as well as my own experience and that of ESOP leaders shows owners must walk the talk, providing leadership in engaging with employees and articulating their ESOP’s values and vision. From this cascades the operating strategies that employees must grasp and believe.
Communications is the key. I am a strong proponent of spending that extra dollar on retaining a communications partner to “help train the trainers” and launch an effective strategy and program that conveys to employees a consistent leadership vision and expectations. Employees want to believe they have been listened and responded to. Nothing kills an ESOP faster than not delivering that.
This communications effort should begin early in an ESOP’s life cycle – but not necessarily immediately. As veteran ESOP consultant and my longtime friend Cindy Prodoehl notes, this process can begin once the ESOP “field fatigue” – from working strenuously to establish employee ownership – dissipates. “It takes a while for the management group to recover its energy and get back to why it established the ESOP in the first place,” explains Prodoehl, a Principal Financial Group vice president.
Prodoehl says the long-term communications effort can wait until the ESOP issues its first financial statement to participants and the employee owners see their first “share” appear in their personal account. This event, which generally occurs a year or so after the ESOP is formed, motivates many employees to become more engaged in helping see their annual share grow.
Many companies find it effective to form a communications or engagement committee. To succeed, it must include leadership – the CEO, chief financial officer, HR leader and representatives of middle management, among others. Remember, they are ESOP employees, too. If you don’t include management, little gets done.
It pays to have the ESOP committee or employees make some decisions that an executive committee traditionally makes. For example, one of Prodoehl’s ESOP clients asked an employee task force to evaluate three-to-four options for controlling health premiums. That group recommended and the company adopted both a self-insurance system and a yearlong program to educate employees about what drives health costs up.
Let me be clear. I am not suggesting that ESOP companies follow a completely “open book” management approach. But leadership should communicate the metrics that help propel earnings and revenue growth, focusing as specifically as possible on the difference employees can make in achieving those metrics. In the retail business, for instance, stock turnover and shrinkage are critical; while in manufacturing, reducing waste and maintaining quality are key determinants. Whatever they are in your business, it pays to underscore these success factors to employees.
As one example, New Belgium Brewing Company, a Fort Collins, Colo., 100% ESOP since December 2012, shares data about key performance indicators (KPIs) because co-founder Kim Jordan believes in providing employees with a clear view into the factors driving managerial decision-making. She also holds an all-staff monthly meeting and an annual strategic planning retreat, where coworkers make decisions about the upcoming year’s business plan. New Belgium considers the retreat “a wonderful way to celebrate, sustain our culture, reconnect ourselves to our vision, and give out a heck of a lot of hugs and high fives in the process.”
Of course, not all news is good – but you cannot hide the bad news. When the economy cratered in 2007-2008, I saw ESOP clients act proactively to preserve both share value and culture. Principal Financial, for one, held an ESOP conference where five employers talked about furloughing employees. Several employers said employees urged them against furloughing younger employees and offered their furlough days. Creative solutions like these can arise when you engage employee owners as a group.
As I’ve noted in the past, economic analyses of ESOPs conclude that employee-owners maintain greater job stability, earn higher wages, and enjoy greater retirement security. In the largest such study, Rutgers University researchers found that ESOPs appear to boost sales, employment and sales per employee by about 2.4% per year over expectations absent an ESOP. They also are somewhat more likely to be in business several years later.
But to get these benefits, owners must communicate and engage with employees sincerely and meaningfully. Very simply, intentionality and success requires employee engagement.