How ESOPs Inspire a Culture of Ownership

In many businesses, ownership and management teams strive to define and implement a culture that differentiates their company from its competitors. Creating an Employee Stock Ownership Plan (“ESOP”) not only preserves but often enhances corporate culture. For years, we have seen companies use ESOPs and various other ownership-sharing tools to attract, retain, and motivate talented individuals. Compelling research continues to highlight that employee ownership can be a powerful tool that yields enhanced corporate performance especially when paired with an “ownership culture.”

Creating an ESOP likely enhances a firm’s “ownership culture.” ESOPs have the ability to not only improve short-term performance but also help increase employee commitment. In fact, ESOPs have been shown to spur innovation. These qualitative benefits all contribute to a firm’s long-term survival.[1]  

Additionally, employee ownership can help eliminate conflicts of interest between owners and employees as incentives become aligned. A study by the Centre for Economic Performance found that a combination of innovative HR policies and a sense of employee ownership are positively linked to employee reports of workplace performance[2]. As the research shows, forming an “ownership culture” creates win-win-win situation; ownership, employees and the company are all better off.

Six Rules for Creating an Ownership Edge

Companies that empower employee owners benefit from an ownership edge. These companies typically follow six essential rules[3]:

1. Provide a meaningful ownership stake to employees; enough to be an important part of their financial security.
2. Provide ownership education to employees. Teach them how the company makes money and their role in making it happen.
3. Share performance data about how the company is doing and how each work group contributes to the success of the company.
4. Train employees in business literacy, so they understand the data the company shares.
5. Share profits through bonuses, profit sharing, or other tools.
6. Build employee involvement. Allow employees to contribute ideas and information daily through teams, feedback opportunities, devolution of authority, and other structures.

Impact of Ownership on Employees and Culture

The National Center for Employee Ownership (“NCEO”) conducted an exhaustive investigation of the impact of ownership on employees and the culture of the firm. The study found a correlation between the number of shares owned by employees and their overall satisfaction. Employees tended to be more committed  to the firm, more satisfied  and less likely to voluntarily leave the firm. Second to ownership, was a cultural impact. Firms have enhanced employee retention and motivation by regularly providing insight into the companies performance, as well as incorporating ample opportunities for participation in operating decisions. Therefore, companies converting to an ESOP should effectively use the ESOP vehicle to enlist employee ideas and employee participation across departments to yield more significant results.[4]

The adoption of ESOPs is part of a general movement linking worker pay to company performance, including profit sharing, gain-sharing and broad-based stock options in addition to the various methods of employee ownership[5].  A 1987 General Accounting Office Report found that approximately one-third of all ESOP firms employed some degree of employee participation. By 1993, this statistic grew to around 60%.[6] These programs can include autonomous work teams, total quality management, or others. The structure of participation varied among sampled firms, but primarily involved employees forming groups to share information, generate ideas and make recommendations. These practices helped the sample group grow roughly 8% to 11% faster than non-ESOP firms.[7]

This growing trend of ownership culture is highlighted with the success of companies like Publix (supermarket chain) and W.L. Gore (diversified manufacturer), which are both widely regarded as some of the leading ESOP firms employing wide-ranging opportunities for employees to grow through company participation at all levels.

Employee Ownership Case Studies

Case Study: Publix

“One of the most important lessons I’ve learned in my business career is that no man puts together an organization on his own” – George Jenkins.

With more than 1,200 locations and more than 200,000 employees, Publix Supermarkets is one of the largest ESOPs in the United States. In 2018, the Company surpassed $36 billion in retail sales. A significant driver of Publix’s growth, and one of its greatest strengths has been its focus on customer service. The American Consumer Satisfaction Index has ranked Publix consistently among the top supermarkets since 1995. Employee ownership is an excellent way to motivate employee’s whose service is critical to success and sales growth. By aligning employee and owner incentives, Publix was able to secure brand loyalty and ensure customers continue to shop regularly based on the service they receive. Annual surveys performed by the Company indicate one of the top reasons employee’s love working at Publix is because of the teamwork they experience. This is one of the reasons, coupled with the benefits provided, that approximately a quarter of all employees have been with the Company for at least ten years. An ownership culture does not just encourage employee retention but can ultimately translate to enhanced corporate performance.

Case Study: W.L. Gore

“I dreamed of an enterprise with great opportunity for all who would join in it, a virile organization that would foster self-fulfillment and which would multiply the capabilities of the individuals comprising it beyond their mere sum” – Bill Gore.

W.L. Gore & Associates is one of the largest, and most successful, employee-owned companies in the U.S. The Company, best known for Gore-Tex, consistently ranks among the best companies to work for by Forbes, The Great Place to Work Institute, and Fast Company. One of the key reasons for the companies success is their focus on culture. Workplace experts have devoted time to understand what makes this company so successful and have implemented the findings across other firms. W.L. Gore has long focused on building a sustainable, “conscious culture.” Its founders sought to combat traditional management hierarchies, and to this day, all employees are known as “associates.” This empowers individuals and creates a value system that encourages all associates to look at “results not only in monetary terms but also in emotional terms.”[8] This faith in corporate culture translates to associate loyalty; full-time voluntary turnover sits at 3.0%[9], a remarkably low metric in the manufacturing industry. With more than $3 billion in annual revenues and more than 9,000 employees, the results of this corporate culture are clear. Motivating and empowering associates to think like owners have had a tremendous effect on its business success.

Sharing ownership with employees is the first step, but not the only step to ensuring your company reaps the benefits of employee ownership. To truly maximize benefits and enhance corporate performance, the company needs to focus on aligning employee and management incentives by developing an ownership culture. Building an ownership culture begins with defining and communicating organizational values, tying them to your performance management process, and rewarding employees for their contributions. Developing a people strategy around your ideal culture will generate change[10]. As companies analyze how their ESOP is doing, or whether or not they should convert to an ESOP, the management teams and owners would be wise to also account for the impact of an ESOP on the culture of the firm. Ensuring companies have the right teams and processes in place to motivate and encourage all employees to act and think like owners will be crucial to an ESOPs long-term success.

If you have comments or questions about this article, or would like more information on this subject matter, please contact us.  Or, visit our ESOP Planning Library to find additional resources to help guide you through the ESOP planning process.

[1] Harden, Kruse, & Blasi, 2010; [2] Kruse, Freeman, Blasi, Buchele, Scharf, Rodgers and Mackin, 2004; [3]NCEO; [4] Kruse & Blasi, 2000; [5] Kruse, 1993; Freeman and Dube, 2000; Sesil et al, 2002; Blasi, Kruse, and Bernstein, 2003; [6] Northeast Ohio Employee Ownership Center and Kent State University; [7] NCEO & Harvard Business Review, 1987); [8] Roberts, 2015. Fortune “At W.L. Gore, 57 years of Authentic Culture”; [9] Roberts, 2015. Fortune “At W.L. Gore, 57 years of Authentic Culture”; [10] ESOP Association

 

Jonathan Mack

Investment Banking

jmack@pcecompanies.com

Orlando Office

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407-621-2151 (direct)

407-621-2199 (fax)