You’ve sold your company to an ESOP. Now what? The way in which you launch your company’s ESOP can have lasting effects on the success of the ESOP and the buy-in and dedication of the employees. It is even beneficial to complete relaunches annually. The launch and subsequent relaunches should occur in a similar sequence every time.
Over the next several weeks, we will be completing a series of blog articles on how to correctly launch and relaunch your company’s employee stock ownership plan. This will require some strategic planning, which should not be confused with a business plan. The major fundamental difference between the two is a business plan is about short to mid-term goals and strategic goals are about long-term goals for the company’s success.
An ESOP is a Qualified Retirement Plan
ESOP stands for Employee Stock Ownership Plan. An ESOP is a qualified retirement plan that can be used as a business transition tool and as an employee ownership vehicle.
An employee stock ownership plan (ESOP) is an IRS qualified retirement plan, similar to a 401(K) Plan, that buys, holds, sells company stock, providing employees with an ownership stake in the company, as well as an additional form of compensation directly linked to success of the company.
- ESOPs and 401(k) plans are both tax deferred retirement plans that are funded by pre-tax contributions.
- While 401(k) Plans are funded with employer and employee contributions, most ESOPs are funded exclusively with company contributions. This means that most ESOPs are provided by the company at no cost to the employees.
- While 401(k) Plans are invested in stock and bonds and other investments, ESOPs are the only retirement plan that is allowed to be primarily invested in employer securities of the company.
- While 401(k) Plan account values are generally updated on a daily basis based on the results of the stock market, ESOP account values are generally updated once per year. This is because most ESOPs own privately held stock. Since there is not a stock market for privately held stock, the ESOP trustee has to obtain a valuation from an independent appraiser once per year.
- A leveraged ESOP is the only retirement plan that is allowed to borrow money. It is also the only retirement plan allowed to enter transactions with “parties-in-interest” (e.g. the company, owners). These special ESOP rules allow ESOPs to be able to purchase stock from the company or owners of the company.
Check out this brief animated video to learn more about ESOPs.
During times of change, senior leaders play a key role as an executive sponsor. According to Prosci’s, Best Practices in Change Management – 2018 Edition, the greatest contributor to a successful change initiative is “active and visible executive sponsorship”.
An executive sponsor is typically a C-Suite leader who oversees a business unit and is responsible for meeting project deadlines. They oversee projects and keep them aligned with the organization's strategy and direction.
During an ESOP implementation and ongoing support and buy-in, the role of the executive sponsor sets the tone for how employee-ownership is embraced in the organization.
Building an ownership culture begins with defining and communicating organizational purpose and values, tying them to your performance management process, and rewarding employees for their contributions. Building a People Strategy around your ideal culture will generate change.
Part 2 of a 3-part series
Numerous ESOP companies have an ESOP Communications Committee which focuses on providing proactive educational materials for fellow employee-owners to ensure everyone’s understanding of this unique, nontraditional benefit called employee ownership. I would like to highlight a few key factors that each committee must plan for in order to be effective in its role.
“Live your values. If you don’t know what they are, go find out.” -Art Barter
When an organization develops a culture based on a strongly held and widely shared set of beliefs that are supported by the business strategy, amazing things happen. Based on an extensive study, employee ownership increases sales 2.3 to 2.4% per year over what would have been expected without an ESOP (Employee Stock Option Plan), reports the National Center for Employee Ownership (NCEO).
The landscape in today’s job market for hiring companies is difficult, especially with the unemployment rate at 4.1% for the past three months, according to the Bureau of Labor Statistics. Unemployment rates are at the lowest since 2000. Employers continue to need top talent to grow operations. This was evident with December’s jobs report indicating, once again, that we added jobs, another 148,000 to be exact. Companies have added 2.1 million employees in 2017 and 2.2 million employees in 2016, so it doesn’t appear to be slowing down anytime soon.
It takes a concerted effort – in time, energy, and resources – to keep good employees. One method that gets results is to establish a mentorship program. It might not be easy because you’ll need buy-in at all levels of your company, but it’ll be well worth the effort. With the potential for five generations in your workforce, a program that matches new employees with company veterans can pay huge long-term dividends.