ESOPs: Employee Stock Ownership Plans (ESOP Roundtable)
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ESOPs: Employee Stock Ownership Plans (ESOP Roundtable)

Welcome to CEO Intronet. Iím your host, Patti
Owens. Weíre here to talk about ESOPs and let me first say what ESOPs are: Employee
Stock Ownership Plans. For some of you who are familiar, youíll know that they could
be the greatest thing since slice bread as a management tool to drive your employees
to higher performance. For those of you who are unfamiliar, youíre going to get familiar
in just a minute. Letís meet our members who will share their stories about why ESOPs
have been productive for their companies. Iím Chuck Pennoni, founder and chairman of
Pennoni Associates. Weíre a consulting engineering firm with about 30 offices from Virginia to
Maine. Weíve had 6 or 7 offices other countries over the years. We are in our 47th year and
we have about 1,000 employees. And Iím Cecil Ursprung. I recently retired
as CEO of Reflexite Corporation in Avon, Connecticut. We have 16 offices around the world and about
500 employees. Weíre founded in 1970. So welcome to both of you. I know you have
both been successful as leaders of companies that have gone through an ESOP. And Cecil,
letís start with you because you are so passionately committed to the idea of employee ownershipÖ I am. That I know youíre on the board of the national
center for employee ownership. Thatís correct. Tell us why ESOPs are an appropriate tool
especially today. For the same reason that Henry Fordís management
style and management techniques were successful for him around the turn of the century. At
that time when the automobile industry was just growing, people were coming to work either
off of farms or immigrants who little or no English were coming into the automotive industry.
And so the jobs had to be broken down and the assembly line had to be broken down so
people could do a simple repetitive job over and over again because they didnít have the
training that they needed to do more. There are big engineering departments and then big
assembly apartments. These days, things have totally changed. There are many people in
Reflexite who have more education than I do. And I have a Bachelorís in Economics and
Finance and a Masterís in Business and some Post Graduate work. So I have a good education
but there are people who are smarter and more educated than I am. The question is ìHow
do you tap into that human potential in todayís environment?î and employee ownership gives
you a channel to tap in and tap into their expertise and all that education that so many
people have and want to use. People want to use it. So youíre saying that a one way to change
behavior in your employee is to give them the tools, the alignment with management,
and the incentive to really bring their best foot forward? Yes. Chuck, what do you think about that? Did you
see changes in your employeesí behavior after you decided to proceed with the ESOP? Absolutely. I agree on Cecil on that. Thereís
no question about it but part and parcel to that is something that I observed which is
putting peopleís mind to rest regarding ownership. When you have a company with founders and
the founders are the owners or a small group of people are the owners particularly in my
world which is consulting engineering, as people get older in the firm and they start
talking about transfer of ownership, if they donít have a defined program in place, something
like an ESOP, thereís anxiety in the firm. In fact, sometimes, it gets disruptive and
divisive. So putting in an ownership plan like an ESOP very early on where people get
to understand that, they donít understand it immediately, it takes a little bit of time,
it really changes whatís going on in the firm because people become very secure, very
comfortable, they know the ownership, they know the program, and they know the future
of the firm relative to ownership. And I think that peace of mind is worth an awful lot. Absolutely. I really do. So the peace of mind is very valuable because
it lets people calm down and bring all of their brains to bare when theyíre at work. Correct. So letís do some myth busting. What were
some of the preconceived notions or fears that your employees actually anticipated about
an ESOP that turned out not to be true? In our case, when we installed the employee
stock ownership plan, we terminated a defined benefit pension plan which was secure, defined;
people knew what their retirement was going to be for a more open-ended ownership position
in the firm. It took us 5 years of diligent, consistent effort to get people to believe
in the power of ownership. Finally, we were able to get rid of our fore plan because nobody
was ever going to get any benefit from it. The ESOP was so much more valuable than the
underlying fore plan, we finally just terminated it and no one had a problem with it. But 5 years of good communication and consistent
communication made that difference. Yes. Chuck, did you have the same kind of experience?
Did people rush to adopt the ESOP right out of the gate? No, exactly the same experience. We did away
with the defined benefit retirement program as well and we put the ESOP in and I would
say 5 years is a good length of time. I agree with that. And you used the keyword ìcommunication.î
You really have to take that extra step to communicate with your employees about what
the ESOP is all about and the benefits. People didnít believe it in the beginning but once
they saw that they truly had ownership, theyíre getting their ownership reports on a regular
basis, theyíre seeing the value grow, and then some people who retire and then get the
benefit, and then communicate back to people how good it really is, then the whole attitude
begins to change. And now fortunately, 18 years later, people are excited about that
and they brag about it that itís an employee owned firm. And in fact, I know both of you have received
testimonial and thank-you letters from your employees who look back and see this as a
win-win, a win for you and a win for them. So tell me ìWhat are the good things and
the bad things about going down the ESOP road?î because I know you did some research about
that. Well, the good thing about it is what weíve
been talking about the ownership, the fact that it puts everyoneís mind to rest about
the future of the company, the ownership of the company. You have part of that ownership,
thatís a good thing. The bad thing is there in the engineering world, there have been
some bad examples where people have failed with the ESOP programs and there are some
companies that when there was a downturn in the economy, and the company was on the verge
of going out of business, and people wanted to cash in their ownership, the money wasnít
there to pay them. One of the things that we do is we make sure we make a cash contribution
to the program every year in accordance with our actuarial projections to make sure that
will never happen to us. And word gets around. Benjamin Franklin said there are no secrets
in the world unless itís between two people and oneís dead. So people know in their own
industries the good and the bad. And the bad seems to trump the good so many times so youíll
have to, using your word, communicate with your employees that youíre aware of the bad
and that weíre not going to fall into that trap, that weíre providing so that wonít
happen to us. So you researched what the risks were and
you assured your employees that they were going to be well cared for. If someone asks
you what are the top 2 things that you should do when youíre walking down the ESOP road,
what would you say the pieces of advice are you would offer? What would you say? Find a way to connect it to things that are
important to the employees. In our case, it was through a quality improvement process
and also financially, we began to pay dividends twice a year on peopleís stockownership to
make that ownership real around vacation time in the summer and around Christmas time in
the winter. Sounds like good advice. And the final word
from you, Chuck. Well, Cecil could have been part of our company
because, obviously, heís so knowledgeable about it and everything he saying, I agree
with 100%. And I think if I had to pick a couple of keywords, Iíd say communication
as a keyword and stability and ownership is another term that I think is very, very important.
And looking back 18 years, we did the right thing and Iím so glad we did it and we would
do everything the same way again if we had to. Not every day you hear such convincing and
compelling success stories. I want to thank our guests for joining us, wish you luck if
you decide to proceed down the ESOP road and you know who to call to get some advice. I
want to thank you for joining us. Patti Owens. Great day.

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