The Employee Ownership Update
July 17, 2017
Bipartisan Bill to Support Awareness of ESOPsSenators Gary Peters (D-MI) and Jim Risch (R-ID) announced legislation on July 12 that would mobilize the SBA's SCORE (Service Corps of Retired Executives) to spread awareness of ESOPs. "SCORE is pleased to support Senator Peters and Chairman Risch's bill to educate small business owners on the value of ESOPs as a potential exit strategy for entrepreneurs who are ready to take the next step in the life of their business," said SCORE CEO Ken Yancey.
Massachusetts Legislature Restores Funding to Office of Employee Involvement and OwnershipThanks to the efforts of Paul Mark and Julian Cyr, both representatives in the Massachusetts legislature, the budget passed by the legislature now includes funding for the Massachusetts Office of Employee Ownership and Involvement. The office, which had been in operation for almost 20 years, was "zero-funded" during the recession. Representative Mark believes that employee ownership will help keep jobs and capital in Massachusetts: "Instead of selling [a business] out to a big corporation and having them move it away and get rid of the jobs, the employees are interested in buying it. This office helps get them the financial skills they need to take over the business, the legal information they need, it helps them with capital if there are any loans that they need, and it helps them set up a new business model," Mark said. [Note: the governor has not signed the legislation. The original version of this article failed to note that the budget will not go into effect unless and until the governor approves the budget.]
Austria Nears ESOP-Like Legislation on Employee OwnershipCurrently, Austrian companies can provide employees with up to €3,000 ($3,400) per year in shares. The stock is usually held directly by the employee. But now the major parties have agreed to a proposal that allow up to €4,500 per year to be contributed to an employee ownership association (similar to ESOP trusts in the U.S.), which itself would also not be taxable. Employers get a tax deduction for the contributions. The association manager would vote the shares according to employee directions. As in U.S. ESOPs, employees would get shares only after termination or retirement. The approach follows the model of Austrian company Voestalpine, whose ownership plan owns 15% of its shares. The bill will be voted on in the next legislative session.
Should Your Company Be on the Employee Ownership 100?The NCEO is currently updating our figures for our Employee Ownership 100 list, our list of the largest majority employee-owned companies in the country.
If your company is currently on the 2016 Employee Ownership 100, please provide us with your company's most up-to-date employee count by filling out our online form.
If your company is not on the 2016 list but has more than 1,000 employees and is majority-owned by employees, you may qualify for the 2017 list! Please take a few minutes to fill out the online form.
To qualify for the list, companies must be majority-owned by an ESOP and/or some other employee ownership arrangement in which at least half of all full-time employees meeting basic service requirements participate. The list is ranked by the total number of all employees, full and part-time, whether in the ESOP or not.
Certificate for Non-Professional Fiduciaries: September 11-12 in OhioThe Beyster Institute at UC San Diego will host its popular training program for ESOP trustees and other fiduciaries for the first time outside of California. The program, which will be hosted by the Ohio Employee Ownership Center at Kent State University, will cover:
- standards for appropriate fiduciary action
- responsibilities for fiduciaries
- practical guidance on effective procedures and processes
- examination of a wide range of fiduciary decision-making situations
Learn more on the Beyster Institute's events page (second item down).
ESOP Communications Tip: Leverage Your LeverageIf you have a leveraged ESOP, each year you contribute some percentage of compensation to make payment on the debt. Let's say that's 8%. You could say, then, that you make an 8% per year contribution to the ESOP. That's good—more than twice what typical companies put into matching 401(k) contributions. But 8% is not what employees actually see added to their accounts each year. What they see is the value of the shares released from the suspense account. If the share value goes up, that will go up past 8%.
Let's say a company called Legacy Inc. sets up an ESOP. The ESOP buys 100,000 shares at $50 per share with a 10-year loan. Each year, the company contributes 8% of its $625,000 annual eligible payroll to the ESOP to repay the loan and pay for $10,000 shares. Say Sally makes $62,500, or 1% of eligible pay. She gets an 8% contribution to her account from the company, and that contribution equals $5,000 in year one.
In year two, the shares go from $50 to $55. Sally gets that same 8% contribution, but the shares that go into her account are now worth $5,500, or 8.8% of pay. If the company continues to do well, maybe after year seven, the stock is worth $120. Now Sally sees not $5,000 added to her account that year, but $12,000.
The effect of leverage is much the same as with a mortgage. If you buy a $300,000 house with $50,000 down and it doubles in value over 10 years, your $50,000 investment yields $250,000 in gains, minus whatever the added costs of owning the home versus renting might be.
Just as with a mortgage, however, the leverage effect can go the other way. Fortunately, ESOP companies have performed very well, so most employee-owners are more like Sally. That means the money put into an ESOP by a company can be a lot more valuable to employees than money put into a 401(k). Helping employees understand that can make the ESOP a more powerful incentive.