ESOPs Produce Big Results

Discussion
Nov 15, 2006

By George Anderson


Publix Supermarkets, Hy-Vee, Wawa, STS Tire & Auto Centers, DCH Auto Group are just some of the successful companies that have gotten that way because of their owners, who by-the-way, also turn out to be their employees.


Today, according to The ESOP (employee stock ownership plan) Association, there are 11,000 companies owned in part or fully by employees. Of this group, 3,500 companies are majority-owned by employees.


Corey Rosen, executive director of the National Center for Employee Ownership, told the Kansas City Star that changes in the tax code have made it more beneficial for companies to operate ESOPs.


“It used to be ESOPs typically owned a minority — 20, 30, 40 percent,” he said. “Maybe 10 to 15 percent of ESOPs were majority owned.” Today, according to Mr. Rosen, between 20 and 30 percent of ESOP companies are 100 percent employee owned.


Across retailing, there are a number of businesses that are employee-owned.


In food retailing, Publix Supermarkets and Hy-Vee are both 100 percent owned by employees. Others, such as Brookshire Grocery, Harps Food Stores, K-Va-T Stores, Piggly Wiggly Carolina Co., QuikTrip and Wawa, are also ESOP companies, according to The ESOP association.


In the automotive services arena, STS Tire & Auto Centers headquartered in Somerset, NJ is the largest independent tire and auto service company in the Northeast. The company, which is entirely employee-owned, has 70 tire and service center locations in New Jersey, New York and Pennsylvania.


Companies looking to improve business results might do well to consider going the ESOP route. According to one study conducted by two Rutgers University professors in 2000, ESOPs increase sales, employment, and sales per employee by 2.3 percent to 2.4 percent per year over non-ESOP companies. Employee productivity at ESOP companies is 4.4 percent better than in non-ESOP businesses.


Discussion Questions: Do you believe ESOP companies that are majority-owned by employees have an advantage over non-ESOP businesses and those where workers
have minority ownership? Why? Do you see similarities when comparing leading ESOP companies in the retailing field?

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9 Comments on "ESOPs Produce Big Results"


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Kenneth A. Grady
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Kenneth A. Grady
15 years 6 months ago

While ESOPs can be linked to stronger financial performance, so can alternative arrangements that are less cumbersome and expensive. ESOPs became popular in the 1980s as a takeover defense structure and, as with many things, have shown some residual value. But, ESOPs can be protective of poor practices and can be very difficult to unwind when they do not work correctly. They also pose barriers to growth through corporate combinations versus organic growth. If the only (or even major) impetus for forming an ESOP is to get better financial performance through higher employee motivation, a Board should tread lightly.

Ed Dennis
Guest
Ed Dennis
15 years 6 months ago

The effect of ESOP ownership has much to do with the value the company places on employees. I have worked in two ESOP situations and, in both cases, the management did a poor job of discussing ESOP ownership with employees. At the same time, management at these companies did not value their employees very highly.

Companies that embrace their employees and treat them with respect will prosper just as quickly as companies who are ESOP owned. Employee performance is much more closely linked to management’s involvement with and consideration of the employee – if there is an ESOP then that’s a plus! ESOP ownership is really just another means of taking a company private – it is not an employee incentive program.

Mark Burr
Guest
15 years 6 months ago

The first example mentioned, Publix, is likely one of the best examples found. Why? When measuring a company’s performance, one of the key factors is execution, from my point of view. Publix not only gains great benefits of employee loyalty by being ESOP, their execution history also reflects it. They are rarely unsuccessful in what they do. They execute extremely well. They are very methodical and very sure of a move before they make it.

Now, the argument can be made that this is much the same as saying it’s because the employees have a far greater stake in success than otherwise. I cannot disagree. However, the two are not mutually exclusive.

In the end, who wins? The customer – that’s the point of it all, isn’t it?

Gene Hoffman
Guest
Gene Hoffman
15 years 6 months ago

Just as a parent finds great emotional rewards in helping their children succeed, employees who own a company find their day-to-day involvement to be both emotionally and financially rewarding. That is a stimulus to contributing constructively to the success of the enterprise and it creates the attitude, “I really care.”

Mark Lilien
Guest
15 years 6 months ago

Obviously, when people feel their ownership stake is significant, turnover is reduced, and turnover is terribly damaging to most retailers in America. There’s no doubt that Wal-Mart’s early success was largely based on the stock options widely bestowed. It wasn’t an ESOP, but the ownership principle is similar.

Furthermore, retailers are often undercapitalized, leading to underperformance and high failure rates. Before forming an ESOP, the retailer generally has to be adequately capitalized. Businesses with adequate capital are more likely to succeed, so it’s natural that ESOPs outperform.

David Livingston
Guest
15 years 6 months ago

Many of my clients are ESOPs and I see a lot of similarities. There is generally a winning attitude among employees. Employees will often police themselves and require less supervision. Coworkers will not tolerate laziness, theft, or poor customer service because it costs employees money.

I always enjoy having low level store employees tell me they have accumulated $250,000 or $500,000 in company stock. Sure makes working that low level retail job a bit more rewarding.

Employee turnover is kept to minimal levels. Employees take much more of an interest in their jobs and in their company when they own a piece of it and it directly affects their income.

But not all ESOPs work. I’ve seen some disasters but generally those were troubled companies to begin with (e.g. Carters in Michigan that went bankrupt).

Len Lewis
Guest
Len Lewis
15 years 6 months ago
It’s never a bad thing when employees have a stake in the company they work for — that’s motivation! It’s also a good way to keep unions at bay. Many years ago, I met Louis Kelso, the father of the ESOP. He was a very persuasive man. ESOPs are relatively few and far between. But they are very attractive under the right circumstances. Chains and owners that sell or donate their shares to an ESOP trust incur little or no tax liability. This makes it a great exit strategy for owners looking to get out of the business or to convert corporate and personal income into tax-free growth capital. It’s a good vehicle for leveraged buyouts by existing management since money can be borrowed from an ESOP trust and paid back in pre-tax dollars. But ESOPS are also complex and expensive and initial costs for consulting and legal fees can be upwards of $80,000 — not the kind of money your average independent is going to dish out. Additionally, employees may find traditional 401Ks with… Read more »
Kevin Mahon
Guest
Kevin Mahon
15 years 6 months ago

Winco is a prime example of a ESOP grocery retailer that has consistently outperformed the industry. I believe the wealth created by the ESOP in return for outstanding performance has ignited a passion and performance that is unmatched by their competitors.

triton rocks
Guest
triton rocks
13 years 9 days ago

In general ESOPs are a good vehicle to increase employee retention, improve morale and help secure funds for retirement. That said, minority-owned ESOPs will work only if they are not a “piggy bank” for the majority owners. I have seen instances where the majority owner (typically a second- or third-generation family) take advantage of the ESOP rules to their benefit, at the expense of the employees. I think it would be a good idea if the ESOP laws were changed to eliminate minority ownership and require at least 51% ownership by employees.

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