Too Much of a Good Thing?

Can an ESOP company be too successful? Gregg Kelly of Orthodyne Electronics isn't complaining about how well his company's ESOP has performed, but he does worry that some employees will leave to take advantage of the huge run-up in their stock. Orthodyne set up its ESOP in 1985, with the plan buying 14% of the semiconductor equipment manufacturer's stock for $600,000. By 1997, when the company did a second ESOP, it cost $12 million to buy 19% of the company. Account balances of the average employee had grown to about $300,000 for those there since 1986. The new ESOP provides about $100,000 per employee based on the face value of the loan.

Kelly said that a few people have left early to get their distributions. The second ESOP will not start repurchasing shares until the loan is repaid eleven years from now, which Kelly hopes will encourage people to stay. Other companies have dealt with this problem by arranging for in-service partial distributions so that people can get access to some of their money earlier.