ESOPS: The Power of Ownership for Employees
“Close the door! You’re letting out the cold air!” I can still hear Mom shouting this to the top of her lungs as my brothers and I were forever determined to drive her absolutely mad. I don’t think it was necessarily that we were rebellious sons or that we even cared that much about taking the time to close the back door. It just didn’t occur to us to do so. Or to turn off the water while we were brushing our teeth. Or to use a “disposable” cup over and over again until it was no longer capable of holding liquid.
It wasn’t until my own kids began to return the favor that my eyes were opened to a perspective that my mom spoke so passionately from. It’s all fun and games until YOU’RE the one paying the bills! Not only do I now understand, I honestly have become unreasonable and just plain irrational at times, much to the joy of my mother! My tolerance level for watching one of my children stand at the refrigerator with the door open is about three seconds. It just bugs me to no end! I can’t understand why they don’t make their decision BEFORE they open the door. Come on, people, have a plan! Get in and get out!
While this is a common story in households across the land, this perspective disparity is something we witness quite often in the marketplace as well…between business owners and employees. For an owner, every penny counts with respect to the bottom line. Owners spend immeasurable time and energy conceptualizing and implementing efficient systems and processes that provide attractive products and services at prices that will create satisfied customers as well as yield a healthy company profit. Conversely, if I’m an employee simply working to collect a paycheck, I tend to not care WHAT the bottom line is. Sure, I suppose I hope that the company stays afloat so I don’t have to venture down the dreaded job search trail again, but most of the time profitability is the absolute last thing on my mind. Is it break time yet?
These differing perspectives can lead to major tension in the marketplace, which can evolve into a vicious cycle. If they’re not careful, business owners can become quite cynical in their treatment of “these ungrateful humans who continually attempt to run this place into the ground!” “Does anybody care about our sustainability around here!?” “My grandfather…now that man taught me how to treat a job!” “Work ethic and unicorns…I’m as likely to find one as the other in this place!” In turn, employees can begin to feel like their bosses are insensitive and overbearing, which can cause them to feel like a commodity rather than a human being. Humans that feel like a commodity often act like a commodity, which exacerbates the owner’s frustration…which further alienates the employees, and…well, you get the picture.
At the end of the day owners and employees, much like mothers and sons, simply see things through different lenses. Right or wrong, it’s just the way it is. So, owners can either spend their lives fighting this perpetual battle, or they can attempt to creatively find a way to break the cycle. Is there a way to alter employee perspective? It’s common to attempt to do this through discipline or even punishment; however, negative coercion rarely creates long-term behavior modification. Paying bonuses or incentives could be more successful, but perhaps the best way to incentivize an employee to act like an owner is…well…to make them an owner!
In 1998, Ron and Rick Betenbough decided to give it a shot. Through some tax planning exercises, they stumbled upon something called an ESOP. This acronym stands for Employee Stock Ownership Plan. Basically, an ESOP is a type of retirement plan that enables business owners to transfer a portion of the ownership of their company to the employees that work there. The plan is a tax-exempt trust for federal and state corporate tax purposes. This enables the company to make cash contributions to individual accounts inside the plan on the behalf of the employees, which they then use to acquire stock in the company. Over time, employees can become major shareholders of the company for which they work.
Since deciding to implement the ESOP strategy some 16 years ago, our original founders have transferred the ownership of over 70% of Betenbough Homes to its employees. No gimmicks. No smoke and mirrors. Over 70% of our company! Ron and Rick have decided that they would rather own 30% of a company full of owners than 100% of a company full of employees.
So, does it work? Come walk through the halls of our business, and in no time you will sense the ownership culture. You’ll be hard pressed to find an “employee” among us. Betenbough Homes is filled with passionate owners who have bought into what we are doing in the marketplace, and give every effort to help achieve success. Since the creation of the ESOP, Betenbough Homes has risen to a rank of 56 on the list of the Top 100 Home Builders in America, while giving profits away to Christian organizations around the world to the tune of $30 million!
Yes, Ron and Rick would say that it has been a success.
In addition to creating an ownership culture within the business, ESOPs can provide many other benefits including substantial retirement assets for employees, lower turnover margins, significant corporate tax relief, and business succession planning. However, as a tax-qualified employee benefit program, an ESOP comes with significant legal obligations. When considering an ESOP, a company would be prudent to consult with an experienced attorney and accountant/business consultant for an informed opinion as to whether the potential benefits outweigh the cost of implementation and ongoing administration.
If you would like more information about ESOPs, or other types of employee equity compensation plans, there is a national organization that exists for the purpose of helping you. The National Center for Employee Ownership (NCEO) is a private, nonprofit membership and research organization that serves as the leading source of accurate, unbiased information on the subject of employee ownership and creating an ownership culture. Their website (www.nceo.org) offers a wealth of information at your fingertips. They also host an annual conference that provides an ideal opportunity to learn and network with others. For those who want to take their research to the next level, the NCEO can refer you to a professional consultant who can come in and conduct a full-blown feasibility study of your company to confirm the viability of an ESOP and develop a process for implementation.
Another national organization, The ESOP Association (TEA), was founded in 1978. This organization offers education and collaboration both on a national scale as well as through a network of 18 regional chapters.
The Association’s focus is on preserving and promoting employee stock ownership through the ESOP structure. Enhancing laws before Congress and regulatory agencies that govern ESOPs and providing its members with expert educational ESOP programming and information are its main concentrations. They too host an annual conference, and their website (www.esopassociation.org) is packed full of resources. For more information regarding TEA, email firstname.lastname@example.org or call them toll-free at (866) 366-3832.
Now if you’ll excuse me, I’ve got to get back to work. Time is money you know!