Employee ownership: The best way to ensure engagement

With employee stock ownership plans capable of keeping employees engaged, why don’t more companies pursue this organizational structure? Nuthawut Somsuk / iStock / Getty Images Plus

There aren’t too many subjects that a majority of people can agree on, such as Caitlin Clark of the Iowa Hawkeyes being pretty good at basketball. Well, you should add employee stock ownership plans (ESOP) to that list.

ESOPs are a kind of employee benefit plan. A trust is set up, and the company funds it through issuance of its own stock or cash contributions. Typically, all full-time employees participate in the plan and are fully vested within three to six years. When the employees leave the company, the company has to buy back their stock at fair market value.

It’s truly a bipartisan issue that everyone can get behind. Democrats love the idea of the little guy leaving a factory job with a payment that could reach $1 million in some instances. More than likely, that would be on top of another retirement plan, such as a 401(k). Republicans love it because it’s a reasonable complement to a government-funded social program. Both political parties love it because it maintains jobs, often in small communities where a decent number of metal fabricating companies call home.

“We’re a strong pillar of our county, our state, and the U.S., and we also provide rewarding work for 200 employee owners,” said Brian Baker, president/CEO of Oconomowoc, Wis.-based Sentry Equipment, which has been employee-owned for almost 40 years. “We’re successful, and it’s not one individual being successful. It’s 200 people being successful.”

Baker credits the ESOP framework with fostering an environment that has employees wanting to make the right decisions to support their company’s customers—companies that use Sentry Equipment’s products and services in the power generation and processing industries. In turn, Sentry Equipment is able to grow the business as its customers grow and attract the attention of new customers at the same time.

He equates it to being waited on by a server at a restaurant who also happens to be an owner of the business. That person has sweat and equity in the business and is going to work hard to guarantee a great dining experience. A waiter working for tips might not be as committed to elevating that dining experience.

That sort of employment engagement is good for both the business and those that work in it. Adria Scharf, associate director for the Institute for the Study of Employee Ownership and Profit Sharing, Rutgers University School of Management and Labor Relations, said her organization’s research, based on national IRS data, reveals that workers at privately held manufacturing ESOP companies have on average $336,190 in what she calls “ESOP wealth.” For comparison’s sake, the average ESOP account for privately held companies in the retail sector is worth $97,288.

An ESOP has plenty of benefits associated with it. So why don’t more companies pursue this ownership model?

The most obvious reason is that most owners are interested in divesting the business as soon as possible. Often private equity is the easiest route to executing that mission.

The other part of the argument is that ESOPs are not that well understood. That mystery leads to people overlooking that powerful opportunity.

Robinson Inc., De Pere, Wis., hosts an annual family open house with activities for the kids and food trucks. The company sees its recent transition to employee ownership as key to maintaining the company culture that has proven successful in helping the metal fabricator to grow. Robinson Inc.

“We needed time for exploration of ESOPs and really getting our heads wrapped around what an ESOP was and how it functions,” said Sam Thomas, vice president/COO, Robinson Inc., a De Pere, Wis.-based metal fabricating company that became an employee-owned company last fall. “Certainly, even after the close, there was a learning curve that you have to settle into and let it play out.”

Baker understands the apprehension because setting up an ESOP sounds complicated. The business owner has to set up an ESOP trust. A trustee needs to be hired. The trust needs to be funded.

Fortunately, he said that several professional service providers are available to help with the transition. They also are affordable, especially when compared to the price a company might pay if it paid an investment banker to market the business for a private sale.

ESOPs have incredible power. In a way, you can say that they turn back time. They create an environment where employees have loyalty to a company because they do well if the company does well. They typically know about the company’s financial performance, so they aren’t left in the dark. From the company’s perspective, they are required to look after their shareholders—the employees. Imagine an ESOP company having a vote to either have some layoffs or have everyone take a slight reduction in pay but keep everyone on the payrolls. That actually happened with one company in the early days of the pandemic.

Metal fabricating is a great industry to be part of. It’s even better for those that can own a part of the action.