An ESOP can provide great tax advantages, especially for 100% S Corp. ESOPs, but this won’t motivate and engage your employees. The ESOP by itself also won’t make employees more productive or increase company revenues.
This is because the ESOP is merely a means to an end, not the end itself. It’s a strategy, not an objective; a vehicle that can take you toward a destination, not the destination itself. Establishing an ESOP can be a transformative company event but only if you take the right actions to harness the ESOP’s full strategic potential.
A universal ESOP objective is the creation of productive employee-owners and their many positive attributes. However, we know that: (1) the ESOP is simply a way to allocate company stock inside a retirement plan account; and (2) this indirect equity stake won’t magically turn workers into productive employee-owners.
So what do you need in your ESOP wallet to create real employee ownership? Your ESOP strategy starts out like an empty wallet, waiting to be filled with valuable inputs, ideas, and insights. However, you should address some key questions before putting things in your ESOP wallet. For example, what type of ESOP company do you want to be when you grow up? Do you already have a participative culture that the ESOP supplements? Do you want a more participative culture and, if so, how quickly do you want to get there?
While there is no single way to design your ESOP strategy or run an ESOP company, studies show that ESOPs are more likely to achieve productive employee ownership if the company has a participative and transparent work environment. In all events, your communications and message must align with your ESOP strategy. Don’t oversell “ownership” to employees in a purely financial ESOP that has a non-participative company culture.
Filling your ESOP wallet properly starts with senior management. The ESOP does not begin as a bottom-up movement; it is decidedly top-down. The original owners choose to establish the ESOP and these owners (or successor management) literally hold this wallet and write the checks. Thus, this group needs to take the lead and the appropriate steps to begin filling your ESOP ownership wallet.
Can your ESOP wallet turn ordinary workers into real employee-owners? Workers will expect greater post-ESOP involvement, particularly if the ESOP is now a majority or 100% owner. The “same old” won’t work once you start calling employees “owners” because they will want to understand exactly what they own.
Getting to an ownership mentality is the same way you get to New York’s Carnegie Hall … practice, practice, practice. Practice makes perfect, but you also must practice what you preach to get to your desired cultural destination.
Here’s a little secret: excellent non-ESOP companies are not all that different from excellent ESOP companies. In both, management creates what we call “Workplaces of We” where rights and responsibilities are shared, customer service is paramount, servant leadership is practiced, and no one says “it’s not my job.” However, here’s the critical difference: at an ESOP company all eligible employees have an opportunity to realize significant wealth accumulation through long-term appreciation in company value.
So what are the most important items needed in your ESOP wallet? It’s not credit cards, it’s credibility. It’s not just teaching employees about stock ownership and ESOP details; it’s about giving them ownership of their jobs and careers.
Job and career ownership are much more complex than providing an annual ESOP allocation. Job and career ownership involve mutual delegation, accountability, teamwork, training, ongoing feedback, empathy, and flexibility.
Training managers in these areas is critical because: (1) good managers make good companies, while bad managers cause discontent and turnover; and (2) employees treat customers the way they are treated by the company and their managers.
Here’s what three past Mid-Atlantic Chapter (MAC) Employee-Owners of the Year (all also from a prior MAC ESOP Company of the Year), say about the fundamental importance of creating ownership cultures of mutual trust and transparency where employee input is both welcomed and valued.
“One of the most critical elements in developing an effective ownership culture is TRUST. Not only the employee owner’s trust in their management, but just as important, if not more so, is the trust that management has in their employee owners.” Steven King, Gala Industries, Eagle Rock, VA
“Ownership is about the individual and the team. It is about recognition of the single contributor, the collective value of the team and the benefits we all receive from ownership together. Our mutual success fosters communication and sharing.” Susan Banks, Comsonics, Inc., Harrisonburg, VA
“We feel our strength as an ESOP company is in our multiple communications to our employee-owners and our Open Door Policy. We have been 100% employee-owned since 1985 and our two-way communications certainly have helped us survive the building industry downturn.” Steve Earle, MidSouth Building Supply, Inc., Springfield, VA
Focus on fundamentals first so you’ll have time also to focus on fun. Once you put these fundamental strategies in your ESOP ownership wallet, you can begin putting in specific tactical ESOP actions like open book management sessions, advisory committees, newsletters, and annual statement events.
As Hillary Clinton might say, “it takes a village” to raise an ESOP. Fortunately, a village of ESOP Association members is available to share its skills and experience in ESOP-rearing activities. Contact Us to help you create bulging ESOP wallets and happy participants in our ESOP village square.