Losing Good Employees? Make them Part-Owners

Barbara Jorgensen -- Expert Business Source, 2/4/2007 5:57:00 AM

High employee turnover is a fact of life in the construction industry. So how do small business owners hold on to their most valuable workers?

Some have turned to employee stock ownership plans (ESOPs) as incentives to lock in their workforce. Similar to retirement or profit-sharing plans, ESOPs allow all employees—not just management—to share in the growth of a company.

ESOP programs award company stock directly to employees, giving them an ownership position and a potential voice in corporate decision-making. The more shares an employee owns, the more committed they are to their company, according to a study conducted by the National Center for Employee Ownership (NCEO). Additionally, employee-owners tend to be more satisfied with their jobs and thus less likely to leave. For the employer, ESOPs offer tax advantages that can be used to fund company stock purchases.

ESOPs, however, are not common in the construction industry, according to Robert Wrixon, assistant vice president and account executive for Arthur J. Gallagher, an insurance, surety and risk management consultancy.

“Contractors generally have different characteristics than companies in other industries,” he says. “The construction business is very competitive and highly cyclical, with many companies leaving the market for reasons within and out of their control.” In other words, it can be difficult for smaller contractors to sustain their business long enough to provide an ample return on ESOP contributions.

Under an ESOP, a business sets up a trust, into which it contributes new shares of its own stock or buys existing shares from departing employees. Shares in the trust are allocated to individual employee accounts. As employees accumulate tenure with the company, they acquire an increasing right to the shares in the account (also known as vesting). The longer an employee stays, the more shares they acquire, and the more those shares are may increase in value over time. (Share price is determined by an independent valuation expert.)

An ESOP is unique among retirement plans in that companies can borrow against the plan. But ESOPs also can be expensive, especially for small companies. According to the NCEO, companies considering an ESOP should ask the following questions:

• Is the cost reasonable? ESOPs typically cost $20,000 just to set up, depending on complexity and the size of the transaction. This is usually much cheaper than other ways to sell a business, but more expensive than other benefit plans
• Is the payroll large enough? Limitations on how much can be contributed to a plan (up to 25 percent of a company’s payroll) may make it impractical for smaller companies to use an ESOP to buy out a major shareholder or finance a large transaction. “As a rule of thumb, a company considering an ESOP should have 15 to 20 people who literally are employees,” says Corey Rosen, executive director of the NCEO.
• Are you comfortable with the idea of employees as owners? Employees may not view their shares as empowering them to run the company – but they will expect more information and more say about its operations.

But if the financial equation works, experts say, so will your employees.

Barbara Jorgensen is a freelance writer based in Mansfield, Mass.