No ESOP fable

A new national survey indicates that most companies with employee stock ownership plans (ESOPs) in 2003 reported increases in revenues and profits over the previous year.
The Employee Ownership Foundation’s 13th annual Employee Stock Ownership Program Economic Performance Survey reported that 88 percent of the respondents believe ESOPs have been good for their companies.
Those improved corporate performances, in turn, are bringing profits home, not just to high-level executives, but to rank-and-file employees, as well.
Southeastern Wisconsin businesses with ESOPs are reporting similar results, in addition to a more satisfied and motivated workforce.
The Howard Co. Inc., a point-of-purchase display assembler based in Brookfield, started its ESOP in 1982. The stock transfer was completed in 1998, when the last shares of stock were purchased from the Howard family.
Bill Hintz, vice president of finance for The Howard Co., said the program started as a way for the family to give something back to their employees, but soon took on a life of its own.
"Ultimately, it is translating into (employees) doing the best jobs they can, because it does impact the profitability of the company," he said. "We do see that employees do care about what is going on if a question comes down the line. If an order doesn’t look right, it’s not just shipping out the door now."
Bea Pamperin, director of human resources for Milwaukee-based RBP Chemical Technology Inc., which has been using an ESOP for the past 15 years, said the plan has been especially valuable for recruiting new employees.
"It is a wonderful tool," Pamperin said. "You can tell the individual that after a period of time, they are part of the company. They have strong feelings that they are all part owners. And they take care of customers like they are owners."
While the creation of an ESOP is not the only thing factor that has made RBP profitable over the past 15 years, it has helped create a sense of ownership among employees, according to Paul Nowak, chief financial officer of RBP.
"People tend to give more," Nowak said. "Part of their retirement is focused on performance. They have a stronger commitment to that succeeding and will do whatever it takes. That’s the strength of ESOPs."
Oconomowoc-based Quest Technologies Inc., which manufactures electronic instruments used to measure worker safety, changed from private ownership to employee-owned from 1977 to 1998.
Dan Heerey, chief financial officer for Quest, said the firm has had results similar to those reported by both The Howard Co. and RBP.
"I think it becomes part of the culture of the company, and as such, it has an impact on the actual operation, including profitability and growth," he said. "(Employees) have an incentive. Their retirement is vested in the ESOP. The growth and shared value impacts their immediate accounts and the perception of future goals."
Both Heerey and Hintz said a federal law created in the mid-1990s allowed their companies to become S-corporations. When a company becomes an S-corporation, it becomes a pass-through entity that pays little to no tax on its earnings. Those are instead taxed pro-rata to shareholders.
ESOPs are tax-exempt employee trusts that are eligible as S-corporation shareholders.
Thus, instead of paying taxes immediately on dividends, the companies were able to reinvest in their corporations. As a result, the ESOP programs are able to grow tax-free, until an employee cashes out shares and pays the tax.
Fully incorporating the programs made the move to an ESOP program profitable for both The Howard Co. and Quest.
Heerey said Quest was further helped by its ESOP’s S-corporation status during the technology boom of the late 1990s, when it was able to develop new products and additional resources.
"As an employee-owned company, there were advantages in having our employees understand the operations of the company and our markets," Heerey said. "And it helped us with the downturn of post 9-11. We were able to come through that without too much trauma."
An ESOP can be an effective tool for growing a company, according to Michael Taibleson, an attorney who specializes in employee benefits at White, Hirschboeck, Dudek, S.C., Milwaukee.
"Anything you can do to give some (employees) real or a sense of ownership is going to provide a more personal stake in the business," Taibleson said. "It’s one thing to be an employee. You’re paid your wage … you clock in and out."
When employees become part owners of a company, Taibleson said, they are given a sense of ownership. That later turns into a more long-term view and how to best add value to the company.
"You’re an investor, an owner," he said. "You’ve got ‘skin’ in the game. It’s equated to having something at risk. You’re not just manufacturing a widget. You’re making sure that manufacturer is sustainable and grows."
The majority of companies with ESOPs have reported improved corporate performances every year since The Employee Ownership Foundation began conducting its annual survey in 1992.
"Time and time again, the results demonstrate creating employee-owned companies through ESOPs is good business," foundation president Michael Keeling said when announcing this year’s survey.
However, Taibleson, who formerly served as a liaison between employee benefit and entrepreneur groups,
said an ESOP is not a silver bullet for all companies.
"There are a lot of ESOP stories, with an entire spectrum of success," he said. "It’s not always the right thing to do, but there have been some good ones."
September 17, 2004, Small Business Times, Milwaukee, WI