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Observations on Employee Ownership

Setting Up an ESOP? Tell Them What Is in It for You

Corey Rosen

August 31, 2011

(Corey Rosen)Last weekend, I had the privilege of listening to one of my favorite ESOP people, Roger Ryberg of Windings, Inc., talk about the ESOP at his company at a conference of the Business Enterprise Institute. Roger bought Windings in 1983 and built the New Ulm, Minnesota, company into a very successful manufacturer of products for electromagnetic/motion conversion applications. In 1998, it formed an ESOP and bought Roger out in stages until the company became 100% ESOP-owned in 2008. We at the NCEO wrote about Windings in a recent newsletter, highlighting the great culture they have established.

Roger told the audience that he sold gradually, in part, because he wanted to continue to participate in the company's growth. He said he had no qualms about wanting to do that or letting the employees know how the ESOP benefited him, any more than he had qualms about telling other people that he also wanted to preserve the legacy he had built at Windings by keeping it an independent, employee-owned company. He said people had no problem with his doing well from the sale, as well they shouldn't—the ESOP has been a very good deal for employees too. That's not to say Roger was after every last dollar he could get—if he were, he could have sold the company to a strategic buyer. It is to say that it just makes sense to treat employees like adults and let them know what an ESOP means for the seller and the company as well as the employees.

In the years I have been making presentations to employees about ESOPs, I always make a point of that too. Many employees have a natural skepticism about the ESOP—it seems like some kind of black box magic. If all they hear is what a great deal this is for them, that skepticism can be fueled, not cooled. People will wonder just why the company is really doing this. There just has to be a catch, they assume. If employees are only told what is in it for them, they will be more prone to see the ESOP as too good to be true.

But when the owners explain why this benefits them and the company too, employees can see better why this plan was established and how it compares to the alternative of selling to someone else (and you should always explain that that is the only choice—at some point, the owners need to sell). Owners can explain how that kind of sale might have yielded an even better price but would not allow the owners the flexibility an ESOP provides for the timing of the sale, would not preserve the legacy the owner wants to leave, and would not be good for the employees in most cases because the buyer will often want to lay people off and/or make unwelcome changes to compensation and benefits to help pay for acquisition costs. In other words, by explaining what is in it for owners, owners have a lot more credibility explaining how they might have done even better with a different approach.

Roger and other owners like him really have no need to be embarrassed about making a good return for their work. These entrepreneurs built good companies, created jobs, and now are providing for a good future for their employees. By treating employees like adults who can understand how the very idea of ESOPs was to provide a financial incentive to business owners to do the right thing, they are taking the first step in creating a true ownership culture.

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