The concept of an ESOP to me has always seemed extraordinary yet at the same time a little hard to grasp. E-S-O-P is an acronym for Employee Stock Ownership Plan. Basically it means an employee owned company. Our guest on today’s podcast is Rich Gaffney, Vice President of Commercial Operations at Sentry Equipment, a 100-year-old manufacturing company in Wisconsin that has been employee owned since 1986.
Rich and I discussed the business structure of ESOPs and most importantly the profound impact that employee ownership can have on company culture and workforce engagement. Even if you have no desire to make your company an ESOP, this interview will give you some ideas to think about as far as how to get people in your business feeling more empowered and committed.
*************
Listen on your favorite podcast app using pod.link.
.
View the podcast at the bottom of this post or on our YouTube Channel.
Facebook: https://www.facebook.com/swarfcast
Instagram: https://www.instagram.com/swarfcast/
LinkedIn: https://www.linkedin.com/company/todays-machining-world
Twitter: https://twitter.com/tmwswarfblog
*************
Link to Graff-Pinkert’s Acquisitions and Sales promotion!
*************
Interview Highlights
Noah Graff: Explain the concept of an ESOP.
Rich Gaffney: ESOP stands for Employee Stock Ownership Plan. It’s a function of each employee having an ownership stake in the company. It creates a midterm or long-term financial vehicle for employees. It’s a potential retirement entity or real equity and ownership over the outcome and successes of the company, allowing employees to share in those rewards.
Noah Graff: ESOPs come in different shapes and sizes, correct?
Rich Gaffney: They do come in different shapes and sizes. There are around 6,300 ESOPs in the US, about 14.5 million participants or employee owners. There are other variations that would increase that count. Every ESOP has boundaries and legal guidelines to establish it.
Companies have latitude over how they give ownership stake, what that looks like, and percentages. So each one is unique.
Noah Graff: Before 1986 Sentry was privately owned?
Rich Gaffney: The original owners of Sentry Equipment decided to retire and had no children interested in taking over. Looking at the employee base, there was an incredible amount of craftsmanship and long tenure. The Hensies wanted to leave Sentry Equipment as a legacy to the employees. They established an ESOP and sold the company back to its employees. Most who go the ESOP route through a transition of corporate ownership are usually about leaving a legacy behind.
Noah Graff: How does the ESOP business structure influence its company culture?
Rich Gaffney: The power of an ESOP is unleashed when you align the culture with the company’s mission. In an ESOP, there’s a connection and transparency that brings that culture forward. It creates and promotes a continual improvement style of engagement.
Our president uses an analogy: If you go out to eat, would you rather be served by a waiter or the owner of the restaurant? Nine times out of 10, you’d say the owner because they have an invested stake in the success. In our case, everybody has some stake in ownership and success.
Plugging into the culture and focusing on the ESOP aspect pulls engagement forward, along with productivity and quality. It brings ideas forward and brings people together around a common goal. We see the business from different perspectives. For example, we get continual improvement ideas from our welding department. They feel empowered to speak up because they know their suggestions can improve the company and serve customers better, resulting in rewards for everyone.
Noah Graff: It sounds like it organically brings out employee engagement.
Rich Gaffney: I think it organically comes out. People come to the table wanting to take pieces of lean manufacturing or other methodologies and apply what they think would best improve our environment. There’s an organic pull on that, tied to sharing in the company’s success.
When companies transition to lean manufacturing, it’s often the executive team pushing it down through the organization. In our ESOP, we’re getting ideas pushed up to the executive team. We’re getting organic ideas from more aspects of the business than you would normally.
Noah Graff: Is it culture shock for people when they join the company from other places?
Rich Gaffney: I think so. As a new employee, you’re told about the ESOP and culture, and you think the honeymoon will end. But the reality is, it doesn’t end because we truly try to deliver on that message. We want engagement from our employees. We do pulse surveying and have engagement at all levels of executive management.
The unusual part for new folks is how a second-shift assembler can approach the president with an improvement idea and actually get listened to. We have quarterly meetings where this kind of interaction happens.
Noah Graff: What if an employee retires? How does that work with how they cash out?
Rich Gaffney: In our world, if you retire from the company at actual retirement age, you get your name on a board here. We have a CEO board. That stands for Certified-Employee-Owner. Your name and years of service are etched into a glass wall in the factory. It’s a proud moment for folks.
For the payout, you get the value of your ESOP plan in shares and percentage over a five-year period.
Noah Graff: Before the interview you mentioned there was a machinist who was a millionaire when he retired. How did he acquire that much wealth?
Rich Gaffney: It’s simple math. He worked here for a number of years. A percentage of his income over those years accumulated in the stock. He continued to accumulate through that willed submission every year, and he also gained because our stock price grew a lot. We had significant growth in our stock through the early to mid-2000s.
We’ve had more than one shop person retire a millionaire just based on their ESOP alone, not including any 401k or other personal planning they had.
Noah Graff: What is one of the biggest challenges for an ESOP?
Rich Gaffney: The most difficult part is managing the communication. I feel a strong sense of responsibility to communicate concisely and succinctly with all employee owners.
We have about 200 employees, and I’m responsible for 200 families putting food on their table and helping them achieve the lifestyle they want. I owe them accurate communication about what’s happening in the business. They have questions, and I owe them answers. The difficult part is we don’t always have the answer in front of us.
Noah Graff: In an ESOP, you have that obligation more than in other companies?
Rich Gaffney: That’s right. If we’re really living the culture of the ESOP, we have to do these things.
Podcast: Play in new window | Download
5 Comments
ESOPs are very interesting. The one thing I was told by a very astute businessman that had a highly lucrative business with multiple operations in different states, was that once you bring in additional ownership, you have to open the books up to everyone. If you are willing to have every one of your decisions scrutinized, go for it. It’s like people that buy 1 share of stock in a company just to be able to hold management’s feet to the fire at the annual shareholders meeting.
Great Point, Robert.
I asked them about that in the interview. He said that 90% of employees attend the meeting. Most of them can’t vote but they all get to put in their two cents.
We’ve been a partial ESOP since 1996 (35% employee ownership). The employees do not want complete ownership. As a small shop (20 employees; $3million to $3.5 million sales) there is generally not enough value in the stock nor the leadership depth to justify complete ownership. Our employees see the ESOP primarily as part of their retirement portfolio (we also have a 401k and do production bonuses), not an empowerment device. The previous owner set up the ESOP as a way to get some equity out of the business and the empowerment aspect of the ESOP was never really established. I would not recommend an ESOP for a company our size – too little financial value; not enough management depth; expensive to establish and maintain (between a yearly stock valuation, accounting expenses , and stock buy backs we’re spending $35,000 to $40,000 per year); difficult to sell a partial ESOP to a new owner.
Really interesting take Walter.
In the interview we talk about how ESOPs come in different shapes and sizes.
Definitely depends on the company.
Do you appreciate the small stake you do have at the company? Or do you wish your company was not an ESOP? A little bit of both?
I was probably the rare person who was willing to buy majority ownership of an established ESOP company (35% ESOP ownership). That willingness reduced my acquisition costs. Majority ownership was fine with me if I could afford it; I didn’t have to own 100%. I don’t have an issue sharing financials or talking about strategy with my employees, nor do I resent the operating costs of the ESOP. Selling my remaining shares to the ESOP is an exit possibility (reducing selling costs and getting a lump sum payment), but not currently the best option.