If your company doesn’t share ownership with employees, you may be missing out on many "hidden" advantages that ESOP organizations experience.
Companies that make the switch typically credit employee-ownership as one of the most important stepping stones that led to a company’s success.
Even though companies may want to sell ownership shares to employees and recognize the tax benefits, they hold off because associated costs and complexities can be more than an owner, executive team or board wants to undertake.
But companies that transition to ESOP often find the advantages can outweigh their initial costs and fears.
The idea of sharing ownership with employees is an exciting venture and one that isn’t easy to toss aside.
Dirk Maroske, President and CEO of Aztalan Engineering, Inc., says, “Because we are known for high quality work and excellent customer service, customers partner with us for the most complex and complicated precision machine parts. That’s why performance is key. Now that we are 100 percent employee-owned, we’ve seen an energized team spirit and over all improved performance.”
Hannah Ross, a customer service representative and Aztalan ESOP Committee member, adds, “The concept of ESOP is a huge incentive for all of us to work as a team, increase production, sales and profit. The idea that our work can directly affect our retirement benefits is huge. Because of this, there is a real team effort as we are all working towards a common goal".
Aztalan Engineering, Inc. located in Lake Mills, WI is a world-class precision machine shop specializing in tight tolerances, high quality and complex parts. An industry leader in contract manufacturing, they primarily serve customers in the medical, aerospace, energy and defense markets. The company was founded in 1978 as an engineering company on a Wisconsin farm but quickly became a machine shop doing contract machining. The company has 75 employees and has been 100 percent employee-owned since 2015.
How An ESOP Works
ESOPs can be found in companies of all sizes including publicly traded and closely-held organizations. Typically, about half of Fortune Magazine’s annual “100 Best Companies to Work for in America” list includes ESOP companies.
According to the National Center for Employee Ownership (NCEO) a non-profit organization that provides resources for ESOP companies, in 2015 there were about 7,000 ESOP plans in the U.S. covering about 13.5 million employees.
ESOPs allow employees to become owners of the company often via contribution plans invested in employer stock. If a trust fund is set up for employees they can contribute cash to buy company stock, contribute shares directly to their plan, or have the plan borrow money to buy shares.
Contributions to the plan are tax-deductible. Employees pay no tax on the contributions until they receive the stock when they leave or retire. The company then repurchases the shares at the time.
Jarod Goehl, a mechanical engineer and Director of Operations, Aztalan, says the ESOP status was one of the major reasons he joined the company. “The structure here has given me an excellent opportunity to work at the next level of operations,” he says.
Jodi Cincotta, with inside sales and member of the ESOP Committee, points out, “The more our ESOP company grows, and the better the company does, the greater the reward will be when we retire.”
Why Share Company Ownership?
Some operations have become successful due to the help of loyal, long-time employees. In situations like these the executive team may vote to transition to ESOP because shared ownership is the right thing to do.
But others see transition benefits this way.
Maroske says, “Aztalan’s founder wanted to transition the ownership of the company to his employees with the intention of rewarding those who helped build the business and ensure continuation of employment and preservation of the company legacy. After spending 37 years growing the business, he developed a strong feeling of identity with the company and sense of loyalty to the employees. By turning over the leadership baton to the next generation, newer employees will have a continuing role in the company as business owners.”
Attracting And Retaining Good Employees.
Aztalan found that while they were transitioning to ESOP both employee groups—new and current employees liked the idea of working for an ESOP company. Maroske notes, “For us, this emphasizes the point that employee ownership can have benefits not just for business owners, but certainly for employees as well.”
Other Benefits — Not Always Known
- Sharing Responsibilities. By definition, running a small business has challenging, ongoing situations. “When you share ownership with employees, you’re also sharing entrepreneurship responsibilities and opportunities,” says Maroske. “This can lessen the burdens of day-to-day challenges of ownership.”
- Raising Capital. Employee ownership can help provide additional capital to an organization. Employee owners may be willing to contribute to the company by buying shares or taking lower wages in return for stock.
- Tax Benefits. Some employee ownership structures can be structured so their ESOP plan qualifies for tax benefits.
- Company Buy-Outs. ESOPs can be used to buy-out an owner when no family member or friend can take over a family business and there is no buyer readily available.
Connection to Corporate Performance
One of the most important realities of being an ESOP company has to do with pride and performance. “When we became a 100 percent employee-owned operation, we could see it almost immediately led to improved performance,” says Maroske.
ESOP performance has been studied at Rutgers University in one of the largest studies of its kind. Between 2000 and 2013 hundreds of ESOPs in closely held companies were studied.
An important finding is that ESOP companies appear to increase sales, employment and sales per employee by about 2.3 percent to 2.4 percent per year over a company’s expectations.
These companies were also more likely to stay in business for many years after transitioning to an employee-owned organization.
Since becoming an ESOP operation Aztalan has implemented open-book management. “This has been quite a journey but it has led to remarkable results,” Maroske says. “With accountability comes responsibility and our stakeholders have been driving continual process improvements to further improve top and bottom line results. With a growing ESOP account balance the company performance becomes more and more tangible for the stakeholders developing an ownership mentality.”
ESOP By The Numbers
Studies have shown that sales, employment and productivity grow faster in ESOP companies compared to performance expectations without an ESOP in place.
Employees also appear to favor ESOP companies because they are more likely to offer many types of retirement plans.
But there’s a misconception that ESOPs may be a tradeoff for wages and benefits. Research shows the exact opposite is true. In fact, ESOP’s benefits are considered added value not a substitute for retirement plans.
“Owning a piece of the organization has been changing how we look at our daily work,” Maroske says. “This has been driving continual process improvements eliminating ‘waste’ and holding each other accountable. At the end of the day we should ask ourselves the following questions.”
- Did I do my best to be fully engaged today?
- Did I do my best to set clear goals today?
- Did I do my best to make progress toward my goals?
- Did I do my best to find meaning today?
- Did I do my best to be happy today?
- Did I do my best to build positive relationships today?
Summing up the ESOP change, Maroske says, “The transition has given us opportunities to further develop and improve our working environment. That has led us on the journey from being a good company to a great company.”