How ESOP Companies—and Their Employees—Win Together

Recruitment is a challenge these days. NCEO member Dialectic posted this blog on its website to help current and potential employees understand the benefits of being a 100% ESOP company.

If you’re a part of the ESOP ecosystem, you may have heard of Dialectic Engineering, a full-service mechanical, electrical, and plumbing engineering design and consulting firm with offices in Kansas City, Austin, and Denver. The company has been a proud ESOP for the past six years, having started its employee ownership journey in 2016.

In honor of Employee Ownership Month in October, Dialectic’s director of HR, Alex Martin, talked through the benefits of being an ESOP and how the model helps Dialectic and its employees win together. Whether they are recruiting talent, enhancing company culture, or providing tax benefits, Dialectic has reaped the benefits of the ESOP model in immeasurable ways.

Focus on Teamwork and Employee Well-Being

In an ESOP model, the good of the business reflects the good of each individual employee due to a shared stake. This ultimately creates a “win together, lose together” mentality that emphasizes collaboration and teamwork—tenets that not only improve morale and company culture, but also have a tangible effect on company performance.

“Our responsibility is to act in the best interest of employees,” Martin said. “When we make decisions, we’re looking to honor that social contract and whatever best benefits the ESOP as a whole. It keeps our mission very focused.”

The recognition speaks for itself from Dialectic’s employees—the firm has been locally ranked as a Kansas City Business Journal “Best Place to Work,” a designation that reflects high employee satisfaction rates and great benefits.

Increased Productivity and Trust, Lower Turnover

With the long-term incentive that an ESOP provides, employees are more likely to work harder in the best interest of the business.

The benefits of working within an ESOP are best reaped the longer you’re with a company, which ultimately leads to drastically lower turnover rates, higher company loyalty, and increased trust within the business.

A 2020 study by the Employee Ownership Foundation found that ESOPs were between three and four times more likely to retain staff at all levels during the 2020 shift to work-from-home, as well as significantly less likely to reduce employee hours and pay.

“An ESOP puts ownership in the hands of those who may not otherwise have it,” Martin said. “When you own something and can buy into it, you take better care of it. The level of engagement within ESOPs is much higher than in other organizations because employees physically own the business.”

Attracting Top Talent

As an HR director, Martin has witnessed firsthand the benefits of the ESOP model in drawing and retaining talent. The benefits of it are an easy sell to new recruits, as an ESOP offers long-term job security and financial incentives.

“When I’ve spoken to new hires, I’ve never not had the lightbulb reaction on the other side of the phone after I explained the ESOP model,” Martin said.

Overall, ESOPs come at no cost to employees—and they help create a stronger, more employee-centered culture. While there are thousands of ESOPs, they account for less than 1% of all companies.

Dialectic reviews company financials with its employees each month to discuss the team’s impact on the bottom line, ultimately boosting engagement and keeping teammates up to date on which dollars are going to the quarterly incentive program.

Dialectic also pays for continuing education and certifications, hosts lunch-and-learns led by employees, vendors, and guest speakers, and conducts a plethora of company events, ranging from holiday costume parties to happy hours to ping-pong tournaments. The firm considers itself a “work hard, play hard” organization, so it promotes a relaxed office environment with a flexible dress code, coffee and beer on tap, and several employee-focused events.

All of these elements, from financial transparency to employee engagement, make working for an ESOP highly appealing to new hires.

Tax Treatment

Employees also pay no current tax on the accumulation of shares in their ESOP account. Upon retirement, diversification, or the end of employment, they can roll over their distributions to an IRA or another qualified retirement plan. Most ESOPs feature an ESOP plan in addition to, not in replacement of, a 401(k).

Transparency

Because each employee has a degree of ownership within the business, the inner workings of a company’s cash flow and other financials are readily shared within an ESOP model. Such a model creates much less distance between leadership and employees, which offers a level playing field to each individual within the company.

Succession

The ESOP model provides an attractive alternative to owners looking to sell, Martin explains. Instead of selling to a competitor or a new entity, an ESOP can sell the business back to its employees, which rewards their years of work in building the company and leaves a resonant legacy. Because ESOPs work in the best interest of their employees, the ESOP model also protects against post-exit layoffs.

A Bright Future

Dialectic has paved the way for inventive, flexible, and sustainable mechanical, engineering ,and plumbing designs with its experienced and enthusiastic team. The ESOP model has allowed a company focus on employee well-being and a strong sense of community with local partners and initiatives—and will continue to do so for years to come.