Explaining an ESOP to employees is difficult. The first challenge is that most employees have little experience with stock, and many do not really understand what stock is, where it comes from, and how it gains or loses value. Second, most employees do not understand how business works. This problem is made worse by the fact that most people either think they know more than they do or don't want to admit that they don't know. Third, ESOPs are not intuitive. At the NCEO, we have a hard time explaining ESOPs to business owners and financial reporters, let alone to everyday employees. One reason is that the terms used to explain ESOPs (allocations, leverage, distributions, vesting, fiduciaries, suspense accounts, valuation, and so on) are usually completely new to most employees. Fourth, employees generally are most interested to know the amount of stock they will receive and when they will receive it. Long explanations of this process can make employees squirm in their seats.
Communicating ESOPs is not easy, but it is rewarding. One of the goals of an ESOP is to improve company performance by getting participants more involved. Research demonstrates that an effective communications program, combined with an ESOP that is financially significant and an active employee involvement program, results in significantly improved productivity and faster sales growth.
This book provides a jump-start to your ESOP communications by giving you (1) chapters about how to communicate employee ownership and financial issues, (2) templates of short documents (included in digital form as well as in the text) you can customize and use as handouts, intranet resources, or newsletter articles; (3) a customizable PowerPoint presentation on ESOP basics; and (4) sample communication documents from ESOP companies in digital form.
The seventh edition builds on the success of previous editions by updating existing chapters and handouts; adding new chapters on communicating valuation, communicating the now of ESOPs, and using employee surveys to improve your culture; adding the PowerPoint presentation; and enhancing the selection of sample company materials provided in digital form.
The digital version of this book includes both a PDF of the text and a zipped file with the entire contents of the printed book's CD. Buyers of the print version of this book will have the digital files (in the form of a single zipped file that you can unzip on your computer to extract the files) automatically added to their cart; after checkout, you can download the zipped file in the My Account section of this site, under the "Files" tab.
Table of Contents
Part 1: Communication Best Practices
1. Communicating ESOPs
2. What You Have to Communicate—and What You Should
3. Rolling Out Your ESOP: What to Say, When, and How
4. Onboarding New Employees
5. Engaging English Language Learners
6. Communicating Valuation: The Power of the Multiple
7. Communicating the Now of ESOPs
8. Sharing Financial Information
9. Using Employee Surveys to Improve Your Culture
10. ESOP Videos
Part 2: Sample Employee Handouts
The History of ESOPs
The Harry the Horse Game
Key Studies on ESOPs and Corporate Performance
How Your ESOP Gets Stock to You
Understanding Basic Business Terms
Understanding Cash Flow
Understanding Company Contributions
Understanding Corporate Taxes
Understanding the Board of Directors
Understanding the Taxation of ESOP Distributions
What If the Company Is Sold
When Do I Get Paid?
Who Does What in an ESOP Company
Appendix 1: Guide to the Communications Materials on the CD
Appendix 2: More Resources from the NCEO
About the Authors
About the NCEO
Contents of the Accompanying CD:
The directory "Part 2 (Employee Handouts)" has each document from part 2 of the book in Microsoft Word .doc format.
The directory "Part 3 (PowerPoint)" has the customizable PowerPoint presentation on ESOP basics discussed at the beginning of appendix 1.
The directory "Part 4 (Company Materials)" has the sample communications materials described in appendix 1 (30 PowerPoint presentations, PDFs, images, and Word documents from a variety of ESOP companies).
From Chapter 1, "Communicating ESOPs"
After the initial meeting, consider having periodic follow-up meetings. These come in two varieties: orientation sessions for new employees and follow-up sessions for existing ones. Ongoing ESOP explanations should be held periodically, often as part of some other company-wide or staff meetings. A good strategy is to take a particular aspect of ESOPs, such as vesting and allocation rules or plan distribution rules, and explain just that piece. It is a lot easier to absorb small bites of information, and the regular discussions communicate in another important way: they remind people that the ESOP is an important part of the company culture.
Orientation meetings are also an essential component. Most companies have employee orientation programs to explain job responsibilities. These programs focus on job training and communicating company policies, procedures, and expectations. Employee ownership companies must also provide orientation covering ownership plans and company culture. This can be especially important—and difficult—for individuals joining employee ownership companies. Their new rights and responsibilities involve new skills and a new understanding of their roles as employees. Creating an ownership orientation program is critical. While programs differ from firm to firm, they usually share the following elements: orientation materials, mentoring, and presentations.
Mentoring can be crucial to employee orientation. Burns and McDonnell, a large employee-owned engineering firm, has one of the most developed mentoring programs. Here, management-appointed mentors attend classes and serve for one year. They also participate in performance appraisals of their "protégés." Mentors assist employees with goal setting, training, communicating ownership culture, and teaching new employees about the company.
At W.L. Gore & Associates, the employee-owned manufacturer of Gore-Tex, mentoring goes one step further. New employees are assigned "sponsors." There may be one or more sponsors per employee. Sponsors take on all standard mentoring roles and act as the employee's evaluator and advocate. A sponsor helps new employees get started on their jobs, receive credit for their contributions, and ensure they are compensated fairly. When employees move on to new responsibilities, new sponsors are assigned to them.
Presentations are another useful tool for orienting employees. At Cooperative Home Care Associates, an employee-owned home health care company, new employees join worker-led discussions on customer service, the company, employee expectations, corporate philosophy, and other issues. The discussions allow new employees to hear various viewpoints and enable existing employees to share ideas and information. This same technique can be helpful when introducing new employees to the company's organizational structure. At Foldcraft, an employee-owned seating manufacturer, employees periodically give presentations covering various jobs at the company. New employees benefit from learning how their work is related to that of others.
Perhaps the most developed—and imitated—orientation program is that of Web Industries, an ESOP company that converts materials for manufacturers. Rather than have managers orient employees, employees at Web Industries assume this role. A four-week training program includes 16 one-hour sessions on corporate history, ownership structure, teamwork, safety, work-order processing, benefits, math, customer service, and continuing improvement. The sessions move from lectures to discussion format as new employees acclimate. Bimba Manufacturing runs a similar orientation program, with employees leading ESOP classes.
Employees instructing classes may lack a professional's polish and presentation skills. This is more than offset, however, by the greater enthusiasm and credibility employees bring to this process. In each of these examples, employees themselves assume responsibility for orientations. This is part of company culture, and it provides an initial and powerful symbol to new workers that employee involvement is the norm. It also adds credibility to the process. Finally, and perhaps most importantly, it provides an exceptional learning opportunity for existing employees. The best way to learn a subject is by teaching it; no one is as proud of a company as when explaining it to someone else. Even if new workers do not need training, this alone would justify an orientation program. Some companies even give employees cards reading "CEO"—Certified Employee Owner.
Examples of these kinds of programs can be found in the sample company materials on the CD accompanying this book. One key tip is to allow existing employees to come to the ESOP orientation session as a refresher.
From Chapter 7, "Communicating the Now of ESOPs"
Companies are often reluctant to talk about the fact that absent an ESOP, the company would be closed or sold, neither happy outcomes for employees. In part, I suspect, that is because it means explaining why the owner chose an ESOP. Explain how Congress set up special tax benefits to encourage this, then explain how the price is determined to dispel notions that this is a sweetheart deal for the seller. This will make the whole transaction more credible.
Then ask people to maybe close their eyes for a couple of minutes and think of scenarios where there is no ESOP. Some employees will wonder why the owners would ever sell at all, so explain that. But most will envision unpleasant outcomes.
Next, you need to communicate why your culture is different (if it is!). Companies that have ESOPs and high-engagement work practices grow 6% to 11% per year faster post-ESOP than would have been expected. Companies with just an ESOP and top-down management actually do worse because they have raised, but not met, employee expectations about being an owner. Engagement practices also significantly reduce turnover and increase employee commitment.
Engagement practices start with open-book management. Companies should share their overall financial results regularly, but also break them down in critical number metrics for various work operations and groups. Getting this information makes people feel more like owners, and creates a game-like atmosphere that is engaging in its own right.
The next step is to structure employee involvement. Having open-door policies and encouraging employees to contribute ideas are excellent practices, but rarely do they lead to much. Employee involvement does not happen because you allow it; it happens because you structure it into teams, ad hoc work groups, committees, and other ways to give people a chance to make decisions about how their work is done. The new ideas that result from this process are what move companies forward.
From "Understanding Stock" in Part 2
A share of stock is worth the amount a willing buyer would pay a willing seller. In other words, if it's hot outside and I have a bottle of cold water, you may want it. You offer $2 for it. The bottle, then, has a value of $2, because you're willing to pay that much for it. If it's cold out and you offer me $1 and I accept, that's what the bottle is worth.
Stock value, however, is a bit more complicated than this water bottle. The value of a share of stock depends on what type of stock is involved. The value of stock of a public company (companies listed on stock exchanges, such as Google), is based on the supply and demand for that particular stock. If there is more demand than supply the price goes up, and vice-versa.
The shares of stock for private companies, however, are not freely traded. These shares are usually not priced until an owner wants to sell them, at which point they are worth whatever price someone is willing to pay for them. In private ESOP companies, however, the stock price is set by an independent appraiser. An independent appraiser determines the price of stock in an ESOP, approximating the amount a willing buyer would pay a willing seller. The appraiser does this by looking at what investors and businesses typically pay to get the profits and assets similar to those in your company. This is a complex process that requires looking at a great deal of data both from your company, the economy, your industry, and other sources.