Laura Pfeiffenberger
October 23, 2024
How To
Set yourself up for ESOP success
By Laura Pfeiffenberger
Employee Stock Ownership Plans, or ESOPs, are having a bit of a heyday. For many business owners, ESOPs offer an ideal succession option, providing a viable exit strategy, while preserving operational excellence, management and company culture, and giving employees a vested interest in the company’s long-term success.
In Maine’s chronically tight labor market, the value of having team members who have a literal stake in the company’s future cannot be underestimated.
Today, there are 6,467 ESOPS in the U.S. holding more than $1.6 trillion in assets. More than 225 new ESOPS covering 41,154 participants were created in 2020 alone, the most recent year for which data is available.
Here are some important factors to think through if you’re wondering whether an ESOP is right for you.
First, think fit. One important dynamic that factors into ESOP success is company culture. In the ESOPs that thrive, pride of ownership is already genuinely felt among the people who work there. Employees consider themselves team members, not just workers, and feel a real sense of responsibility to see colleagues, and the broader organization flourish. They clearly understand how their daily contributions make a difference in the company’s performance and reap a sense of satisfaction out of it. That kind of culture can’t be created on the fly — it can only be built and nurtured over time.
Get buy-in from the beginning. Often the decision to convert to an ESOP is made by the company owner, or one or two senior executives, and details are kept close to the vest until the final decision is made. But ultimately the implementation of the ESOP is done by the management team that remains with the company after the conversion is complete. That team must be brought into the consideration process early on, as you’re laying the groundwork, to ensure that those individuals understand how the ESOP will impact their roles and opportunities, and that they’re on board with it.
Prioritize communication. A major benefit of an ESOP is that it gives employees a vested interest in the company’s success. To really instill that sense of ownership, it’s critical to ensure that all participants, from the management offices to the production floor, understand what the ESOP means for them. It’s also important to keep them informed about how their daily efforts and decisions, about everything from which supplies to purchase to which vendors to use — impact shareholder value. All ESOPs should establish a communications committee, made up of participants from all levels of the organization, to keep information flowing.
Reach out for help. By law, an ESOP must appoint a trustee to oversee the ESOP administration, like determining the value of the stock and coordinating with attorneys to ensure plan documents are being followed. Some ESOPs have an officer or executive serve in this role. Engaging an independent trustee, particularly an institutional trustee, enables the company to tap into a team of experts who have experience with many different types of ESOPs and whose focus is to keep your plan on track throughout the lifecycle of the ESOP.
Laura Pfeiffenberger is a senior vice president and ESOP client advisor for Spinnaker Trust, which is based in Portland.
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