ESOP no fable
Employee Stock Ownership Plans: They keep businesses locally owned, they offer tax benefits, and a stake in the companies` future

The Plain Dealer
August 5, 2007
By Shaheen Samavati

In planning for his retirement, Robert J. Schneider needed a way to cash out his sole stake in Macedonia-based Patio Enclosures Inc.

He was reluctant to sell, though, because he wanted the goals and principles of the company to stay intact, said Floyd Griffin, vice president of human resources for Patio Enclosures. Schneider`s father, Albert, founded the sunroom manufacturing company with business partner Leon Shon in 1966.

Schneider was intrigued when a financial adviser told him about the option -- and tax benefits -- of selling shares to his employees through an Employee Stock Ownership Plan, Griffin said.

Under an ESOP, employees receive stock in the company that is put into a retirement account.

Today about 10 million Americans work at 11,000 employee-owned companies, according to the ESOP Association in Washington, D.C. The vast majority are privately held and have 20 to 400 employees, said Bill McIntyre, interim director of Kent State University`s Employee Ownership Center. He estimates that Ohio has 450 companies with ESOPs.

ESOPs play an important role in the regional economy, McIntyre said. "Employee-owned companies tend to keep the jobs local, keep the ownership local, and tend to anchor capital in the local communities."

For many business owners, it can also be a way to transfer ownership while avoiding large capital-gains tax bills.

Schneider retired in June knowing his company was in good hands. He began selling shares to his employees in 1996 and Patio Enclosures became fully employee-owned last year.

Over the past decade, the ESOP has become more than a perk for the company`s 750 workers, Griffin said.

"Each employee -- whether they`re putting an enclosure on your home, putting it together or cutting the glass -- they each have the potential to make an impact on the value of the company," he said.

Griffin said employees have become advocates of increasing profitability and share value. Many have even joined "Reduce Our Costs" teams that focus on coming up with innovative solutions.

Debbie McCourt, Patio Enclosures’ payroll coordinator, said she has been active in educating other workers about the ESOP almost since she started at the company six years ago.

She took part in one focus group that looked at cutting costs of field workers. The group found the cheapest rates for employee hotel stays and oil changes on company trucks.

Those and other worker ideas saved the company about $250,000 in 2006, McCourt said.

“We all want to keep our stock valuation high so when we retire we have a nice little nest egg going,” she said. “I genuinely care about what’s going on here.”

As employee-owners, workers are more likely to worry about things like customer attitudes, customer service and how to trim waste, said Michael Keeling, president of the ESOP Association.

“Owners think in terms of how to do things more efficiently,” he said. “If you have the majority of the work force thinking in that manner, it’s like a miracle.“

That has been the case for the Chilcote Co., according to Robert Marn, vice president of human resources for the company that manufactures photo packaging and provides finishing services for the graphic arts industry.

He said there has been a noticeable difference in the level of efficiency since the ESOP started in 1984. Today the company is 47 percent employeeowned, and the rest is held privately by members of the Chilcote family, who are expected eventually to sell the rest of their shares to workers.

“You can just see it everyday in employees’ attitudes,” Marn said. “They turn the lights off, they pick the papers off the floor, they come in on time.”

Employee ownership took off with federal legislation that created the ESOP model in 1974, and they became popular among large, publicly traded companies in the 1980s as a way to block hostile takeovers.

But in 1992, changes in accounting rules made earnings per share appear lower for companies with ESOPs, Keeling said. The model became less attractive to publicly held companies.

By that time, the rapid increase in employee ownership had already subsided after Congress removed certain tax incentives in 1989.

However, the overall number has remained relatively steady since the mid-1990s, Keeling said. And in 1998, a law passed making ESOPs more attractive for many smaller companies.

The law opened employeeownership up to S corporations, which have a special tax status: Instead of paying corporate taxes, the company’s owners pay individual income tax on their share of the company’s profits. S corporations that are 100 percent employee-owned pay no immediate tax on corporate profits because the owners are putting the money into tax-deferred retirement accounts.

Since the law change, McIntyre said, more companies have sought to become S corporations. Most notable is the Tribune Co., the Chicago-based media conglomerate that billionaire Sam Zell is buying out. He structured the $8.2 billion transaction around an ESOP to avoid paying millions in taxes.

McIntyre said there is concern among employee-ownership advocates that Zell’s use of the ESOP model for large-scale personal benefit could hurt the credibility of employee ownership and lead to more changes in the law.

On the other hand, he said, it’s not all bad.

“In the case of the Tribune Co., there is one person involved who is going to benefit from the transaction more than anybody,” he said. “Of course, the employees will benefit, too.”

ESOPs are already looked at negatively sometimes because of the publicity large ESOP companies attract when they face hardship or go bankrupt, McIntyre said. In those situations, employees are likely to see their retirement purses evaporate.

But even then, employee ownership can at least help workers hold onto their jobs a little longer, he said.

“In some cases, the company happened to be in an industry that was really tough competitively,” McIntyre said. “But instead of going out of business in two years, it might survive for 10 years.”

To read full article, click here.

© The Plain Dealer