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The Benefits and Challenges of ESOPs

MHEDA members share their experiences with employee stock ownership plans

The topic of transition plans has been a hot button issue throughout the industry in the last several years. As Baby Boomers have begun retiring, they need a transition plan to ensure that the company continues to thrive. Some opt to sell the company to the next generation of ownership, some opt to be acquired by other companies. Increasingly, the option of converting the company to an ESOP or Employee Stock Ownership Plan has become popular. According to the National Center for Employee Ownership, there are roughly 14.1 million ESOP Participants and 6,717 ESOPs in the United States. We had the opportunity to speak with four MHEDA members who have ESOPs at their companies about the benefits and challenges of having an ESOP. Thank you so much to Mary Lou Jacoby, CEO of Warehouse1, Matt Maddock, President of Sunbelt Industrial Trucks, Jack Smith, lead trustee at Modern Group, and Tom Albero, President and CEO of Alliance Material Handling, for answering these questions for this issue of the magazine.

The MHEDA Journal: Your company has an ESOP, what year did you become an ESOP?

Mary Lou Jacoby: We became an ESOP Dec. 31, 2016. We announced the transition on Jan. 11, 2017 at a companywide meeting. We invited all the people that were an integral part of the 14 month long journey it took to create the entity.

Matt Maddock: We started the ESOP in the spring of 2012

Tom Albero: We started in 2004

Jack Smith: We started Modern Group Ltd’s ESOP program in 1984.

TMJ: Tell me about the decision-making process that went into becoming an ESOP.

MLJ: When I began thinking about a succession plan five years ago, I initially ruled out an ESOP. Instead, I worked on developing and mentoring a strategic team that eventually would run the company. But a little more than a year ago, I revisited the ESOP model thanks to conversations with compensation specialists.

We have the smartest, most engaged and caring group of employees that we’ve ever had in our history. I felt like it was the right time to share and give back to them what they had given to the organization. In the last five years, we’ve had significant growth due to these talented people.

I began attending local ESOP association meetings and talking to companies that have adopted the model. They shared the positives and what they would have done differently.

This feedback from folks that had been there, done that….It was the best and the most important piece of the puzzle that made it all fit. The most important thing was the contributions that the employee owners would make to the continued success of the company in terms of new ideas and new avenues that might be potential business additions. It’s a motivational tool that is unparalleled to create engagement.

It was a very long process. I wanted to make sure the company would survive and thrive long term to benefit the employees who helped to make it successful over the past 25 years. Some of the original employees still work at Warehouse1 today, and many others have 10, 15, and 20 years of tenure with the company.

MM: Bill (Rowan) and Warren (Cornil) wanted an exit strategy that would allow them to reward the people who deserved the benefits of owning the company the most and at the same time allowed them to cash out their stocks.

TA: The owners wanted to sell their business and the management team decided that it would be best if we formed an ESOP and had everyone participate in the Company’s success. We all agreed that this would be a key differentiator in the market that would help us attract and retain key personnel, especially technicians.

JS: We converted a profit sharing pension plan into an ESOP Plan.

TMJ: How do you believe that being an ESOP has impacted your company’s culture and the productivity of your employees?

MLJ: Still early but many employees have bought in right away and are thinking about how to increase their own productivity and offering ideas/ suggestions that will have a positive impact. Some employees are starting to realize the value of the plan and adjusting their work habits. Other employees will hopefully buy in.

MM: We always believed we had a great team but the ESOP took it to another level. The employees are much more engaged and it shows on the bottom line. Every owner has a say in how we can improve the company and its profits.

TA: 80 plus percent of our employees will stay until they retire. They believe in the company and have seen their ESOP balance grow beyond their expectations. It has become easier to recruit talent for our company. All levels of employee/ owners focus on generating revenues, improve procedures and finding ways to reduce expenses. Our productivity numbers are all above industry standards!

JS: Modern’s culture is based on the fact “the employees are the owners.”

TMJ: How did/have employees reacted to being stock holders in your company?

MLJ: We are in the early stages of the ESOP but we have already seen an uptick in employee engagement. Employee owners have a better understanding of the company’s big picture and have started offering cost saving ideas and marketing/sales recommendations to increase profitability and overall stock value.

Scott Harleman, Sales: “It’s really simple. None of this could have happened without this woman’s vision and leadership. The gratitude I have for this adventure is beyond words.”

Mike Jasa, Purchasing Manager: “Warehouse1’s ESOP is a benefit provided to all employees to share ownership in our company. When we work together to promote growth at Warehouse1, we increase profit to the company and share value to us all!”

Kirk Nielsen, Government Projects: “Mary Lou GAVE us this fantastic opportunity: a stake in the ownership of Warehouse1. We have zero monetary investment in this opportunity. The only individual investment we have is our daily work input and attitude toward making and keeping the company profitable. We all owe Mary Lou a huge THANK YOU for this gift!”

MM: At first it was confusing so not everyone understood the benefits and what it would look like down the road. But after we paid off the first round of debt, their statements had more meaning. The light does not turn on all at once, it’s a gradual path to full engagement.

TA: They love it. Retired employees send in letters or pictures of vacations they are taking or retirement houses that they have paid for through the additional funds they have received from the ESOP. The owners have a level of pride for the company that was not as great prior to the ESOP.

JS: We frequently hear “turn off those lights; “we can sell that scrap metal”; “use the paper on both sides for internal notes.”

TMJ: Were there any unexpected challenges or hurdles you faced when becoming an ESOP?

MLJ: The road to establishing an ESOP is full of bumps and holes to fall into. The creation and establishment of a plan requires many months of learning to understand the complications, intricacies of the program and the many decisions that are necessary to creating a fair and equitable plan. We were fortunate to have patient and excellent support throughout our journey from our valuable partners: Gayle Evans, our attorney; Frank Halbhuber, our accountant; Stern Brothers, Valuation; Community Bank of Pleasant Hill, Trustee; ESOP Partners, our plan administrator, and many, many hours of assistance from our internal staff of professionals, Steve Schulte, our CFO; Fay Byrd, our Director of Administration; and Gary Selvera, our President.

There was a lot of hand holding and hand wringing during that 14 month process.

MM: Yes. Many. So many we forgot many of them. But it was all worth it. Overall costs were greater than we imagined. The time it takes from end of year to passing out the individual statements is much longer than we planned for. About nine months.

TA: It took 3 to 4 years before employees really fully understood the impact of the ESOP and what value it meant to them personally. We thought they would get it from day 1. It is hard for an employee to understand the benefit until they see a statement showing them how many shares they have and what those shares are worth. Year 3 becomes a Wow factor for them as many times they are seeing their original statement double or triple in value. In down years when the price per share may slip downward, they are surprised to see their overall statement increase. This occurs because every year they are receiving new shares so the drop in price on the old shares is more than offset by the new shares they receive in the current year.

JS: When markets have changed, we have been able to move our employees to new challenges and opportunities.

TMJ: Do you have any advice for other MHEDA members who might be considering becoming an ESOP?

MLJ: Join the local ESOP chapters of esop.org and neco.org and meet the companies and people that are living the potential of this concept every day.

Meet them, talk to the employee owners and the original owner for their perspective on the effect it has had on each of them. I made 35 reference calls.

And every one, without exception, was open and eager to share their experience, extremely pleased with the outcome, and extremely optimistic about the future.

Carefully interviewed all of the consultative people necessary to complete this operation. Hire the best to be your advocate, not the cheapest. Listen to them and follow their advice.

Kind of like a home remodel: plan on it taking twice as long as you thought and it costing twice as much as everyone told you it would!

MM: Yes, make friends with someone who has done it before and discuss what challenges they had to overcome. This works for both the sellers and the employees. Join the ESOP Trade Organization. It’s an opportunity for a true win-win situation but it takes time, money and a high level of participation from both the sellers and the key people remaining in the company.

TA: It has been a great vehicle for the retiring owners and at the same time rewards all of the employees that helped them get the payout that the owners deserved. Not enough companies are willing to do this. Our company’s results since 2004 have proven that it can be extremely successful.

JS: Study the opportunities and challenges of the ESOP world; obtain good legal and financial advice from qualified consultants and enter it with enthusiasm.

TMJ: Is there anything else that wasn’t discussed that you think is important to mention on this topic?

MLJ: It ain’t over when you think it is. I have learned two valuable lessons. The most successful ESOPs are the ones that spend time, money, and resources to continually educate the employee owners about “what’s in it for me, now?”, “what can I do about it anyway?”, and “what does this all mean anyway?”

We have an internal “TEAM ESOP” with members from all parts of the company to learn all they can about ESOPs in order for them to pass that knowledge on to their employee owner team members. They are brainstorming and implementing ideas to keep the ESOP top of mind and soliciting ideas for cost savings, performance improvement, sales improvement suggestions, ways to share financial information, and event planning and execution. This is vital to the ESOP success.

For information about the challenges and tactics we are trying, visit our ESOP page at www.wh1.com/esop.

MM: Key people after the sale are critical for the long-term success of the ESOP and the company.

TA: We continue to find ways to keep our employee owners informed and updated on how the company is doing. We did not do enough of this in the beginning. The more we focus on this the less turnover we have. There will always be 10–15 percent of employees that just do not get it and would rather see more short term benefits than a long term benefit. The 85–90% of employees that remain and get it will now celebrate those that depart because they realize that they just are not the right fit for our culture and the shares that they forfeit or sell back to the ESOP go straight into their accounts and make their statement even higher in total value.