What does working for an ESOP company mean to an ex-ESOPer? Plenty!
In 1991, I joined the staff of Berkeley Policy Associates (BPA), a small social policy research/program evaluation firm in Oakland, California. In 2011, two months shy of my twentieth anniversary, I left BPA to enter the PhD program in English Literature at the University of Wisconsin-Madison. In between (in 1994, to be exact) BPA became 100% employee-owned via an Employee Stock Ownership Plan (ESOP). So I was leaving not only a company, but a company of which I was a part owner. However, my confidence in the ongoing benefits of employee ownership allowed me to feel comfortable leaving my retirement in the hands of my fellow employee-owners while I pursue my doctorate.
The primary advantage of an ESOP (especially a 100% ESOP like BPA), is that, both in theory and in practice, when every employee has a personal stake in the success of a company, everyone will be (literally) invested in the company’s continued success. This motivation operates in several ways. Perhaps most importantly, employee-owners learn more about how the business operates (rather than just how to do their specific jobs). This means that in both good times and bad, they understand the relationship between their individual efforts and the overall success of the firm. In good times they look at the long term for ways to ensure continued success. In bad times (and no company is immune), they are often more willing to make sacrifices and go the extra mile to bring the company back into prosperity. As BPA’s HR Director (and ESOP Trustee and administrator), I was privileged to see how the theory of ESOP involvement was put into practice in the course of several upturns and downturns over the years.
Much of the theory glossed above concentrates on motivating (and retaining) current employees. But what good is the ESOP when, as an ex-employee, one no longer has the opportunity to contribute directly to the bottom line? BPA’s ESOP currently begins to repurchase shares from former employees after the third anniversary of their departure, and in most cases (except with very small accounts) repurchase extends over a five-year period. Therefore a big chunk of my retirement is out of my control entirely for three years – I can’t invest it elsewhere, rebalance it, or direct it in any way – and then only one-fifth of the balance will come into my control each year for five years after that. How can the ESOP still be an advantage to me?
The answer is simply that the ESOP philosophy gives me the confidence to believe that my former colleagues will continue to work in their own best interest, doing whatever is needed to maintain and enhance the company’s value, which coincides exactly with my best interest. The financial and project management practices that have enabled BPA to be successful in the past will be continued, which will benefit all shareholders, including those like me who no longer have an active role in contributing to the firm’s success. Also the fact that repurchased shares are reallocated to current employees provides an incentive for current employees to keep the firm in a position to repurchase shares. Additionally, although on a more somber note, my having an ongoing stake in the firm means that I (and all former employees) have an active interest in not doing anything to harm the firm, which is not always the case at non-employee-owned companies. In short, the ESOP will continue to provide a benefit to me long after my active involvement has ceased.
Frances Laskey is a former HR director and current Ph.D. student in English at the University of Wisconsin-Madison.
Read this article: Wealth & Income Effects of Employee Ownership Act Now