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Communicating Your ESOPPresented by

Loren Rodgers, National Center for Employee Ownership

Loren Rodgers

Loren Rodgers is a project director at the National Center for Employee Ownership and will become its executive director in April this year.

Loren joined the NCEO in 2005 after working ten years as a consultant to employee-owned companies. He is a frequent speaker and writes extensively on many aspects of employee ownership in

f i l d d i bli ti H k ith iprofessional and academic publications. He works with companies on governance, plan design, operational issues, assessment, communications, and ownership culture. He also consults internationally on employee ownership as public policy. He studied at the University of Michigan’s Institute for Public Policy Studies, where he focused on employee ownership in the United States and in Slavic countries..

Agenda

1. What to communicate

2. When to communicate

3. Who communicates

4. Common communication pitfalls

5. Tools and Resources

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• Faster GrowthCompanies with ESOPs grow 2.3% to 2.4% faster measured in sales, employment, and productivity growth.

• Higher compensation5-12% higher wages than in comparable non-ESOP companies.

• More assets

Why Are We Here?

ESOP employees have 2.5 times the retirement assets in company-sponsored plans.

• Improved company stabilityLess likely to face bankruptcy or acquisition; 20% better “survival” rate.

Investment Return

Low to Low

Why Are We Here?

Incentive Only Low to Medium

Low(-1 to 2%)

Culture + Incentive High High

(5 to 13%)

Survey: What does the ESOP mean to you?“I think of working at a place that is worth

putting my time into.”

“As an employee/owner, it is my

Why Are We Here?

responsibility to take a hard look at what I can do to work more efficiently, to curb my expenditures and to suggest time/cost savings on to others.”

“My future financial status is in my hands.”

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Survey: what does the ESOP mean to you?“I’ve heard all this stuff at other places I’ve

worked but it never happened…”

“Am I supposed to know what this is?”

Why Are We Here?

“When they say we're employee-owned, all they mean is that employees have stock.”

“I'm not sure I want to be an owner.”

1. What to Communicate

ESOP Transaction

ESOP Value

ESOP Mechanics

Benefit to seller

Seller’s perspective

Public policy / Congress’s goals

“We’re not strange”—the

Business Literacy

Data

Culture

We re not strange the state of ESOPs in the US

Congress Supports ESOPs

Congress passed Employee Retirement Income Security Act (ERISA) in 1974 to

• increase retirement assets

• distribute wealth more equitably

• create a more competitive economy

S Corporation ESOP law: 1997

Pension Protection Act: 2006

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Employee Stock Ownership Plans

• 10,500 ESOPs today in US

• About 13 million employees

• Over $900 billion in assets

Growth of ESOPs

From “A Statistical Profile of Employee Ownership,” www.nceo.org/main/article.php/id/2/

Examples of ESOP Companies

New Belgium BrewingFort Collins, CO

StylmarkMinneapolis, MN

ITAGroupWest Des Moines, IA

King Arthur FlourNorwich, VT

Glatfelder InsuranceYork, PA

Gardeners’ GuildRichmond, CA

Zachary’s Pizza

www.nationsonline.org/maps/USA_blank_map.jpg

Cal-Tex CoatingsScherz, TX

CALIBRE SystemsAlexandria, VA

Quik TripTulsa, OK

Publix SupermarketsLakeland, FL

SAICLa Jolla, CA

Oakland, CA

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ESOP Transaction

ESOP Value

ESOP Mechanics

Potential growth• Self-directed projections

• No promises

Business Literacy

Data

Culture

• Highlights of ESOP research

Acknowledge risk

Link risk and reward

Employer Contributions to ESOPs

• National average for all retirement-oriented plans:4% of compensation

• National average for ESOP t ib ti i i t icontributions in private companies:

8 to 10% of compensation


ESOP Transaction

ESOP Value

ESOP Mechanics

The “hard facts”

Participation

Contribution / allocation

Vesting / distribution

Taxation

Di ifi ti

Business Literacy

Data

Culture

Diversification

Voting / governance

Required Communication• Account statements

• Summary Plan Description

• etc.

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What Is an ESOP?

ESOP stands forEmployee

Stock

Ownership

PlanPlan

ESOPs must follow federal law because the federal government provides tax benefits when ESOPs meet certain requirements.

ESOPs and 401(k)s

ESOPs are benefit plans.

They have many of the same rules as 401(k) plans. Key exceptions:

• ESOPs invest primarily in company stock• ESOPs can take loans

Employees do not use their own assets to acquire stock in anEmployees do not use their own assets to acquire stock in an ESOP (with rare exceptions).

401(k) plans are not usually effective for ownership transition.

Common Misperceptions

• Employees don’t pay for their stock (with some exceptions)

• Beneficial ownership, not direct ownership

• Minority ownership, not controlling ownership

• Some governance power, no management power

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Legal Rights of ESOP Participants

To Receive Information About the PlanTo Have Access to Plan DocumentsTo Receive Annual Account StatementsTo Direct a Vote on Major Corporate Decisions

• Liquidation• Sale of substantially all assets• Recapitalization• Merger or Consolidation• Dissolution• Reclassification

Overview of ESOP Flow

Original Owners

ESOP Former participants

Step 1

Step 1: The ESOP transaction


Original Owners


Step 2


Step 2: ESOP operations

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Original Owners



Step 2: ESOP operations

Step 3: ESOP distributions

Step 3


ESOP Transaction

ESOP Value

ESOP Mechanics Business concepts

Business Literacy

Data

Culture

Your business model

Corporate vision/purpose

Critical numbers

Connections

Valuation

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Reflexite Business Contingency Plan


ESOP Transaction

ESOP Value

ESOP Mechanics

Business Literacy

Data

Culture

Track performance

“Current Events”


ESOP Transaction

ESOP Value

ESOP MechanicsDefine ownership

Business Literacy

Data

Culture

Define ownership

Manage expectations

Busting rumors

Clarity about decision making

Principles

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Defining Employee Owner

Being an employee-owner means:• Connection with the business realities (information)• Responsibility to influence others up, down, and across the

organization (communication)• Financial Incentive to make wise decisions (stewardship)

It does not mean:• Unlimited access to all business information (total

transparency)• Control beyond clearly understood boundaries

(unlimited authority)• Guaranteed employment couple with predictable

investment returns (elimination of personal risk)

The message is the message.

Carl Warren & Company “shares a lot of information. That’s partly to give employees information they need, but it serves another purpose as well. The sheer volume of information shared by the company, in good times and bad, reinforces the idea of transparency and makes it harder for anyone to claim that there must be a hidden agenda.”

The Employee Ownership ReportJuly/August, 2008

2. When to Communicate

http://www.allposters.com/-sp/Jazz-Band-Posters_i1665756_.htm

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Newsletter

Annual meetings

Monthly brownbags

Periodic Employment Cycle

Weekly CEO message

Huddles

Middle manager retreats

Employee ownership month

Permanent Opportunistic

Employee Ownership Month


Interview

Orientation

1-, 3-, 6-month review


Participation

Full vesting

Diversification

Retirement age


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Employment Cycle

Thank you to CALIBRE Systems for this slide.


Summary Plan Description / Plan document

Intranet FAQs

I AV di


Intranet AV recording

Corporate library

Hotline

ESOP champions


Intranet

ew B

elgi

um B

rew

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Than

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Periodic

Rollout

ESOP/Company milestones (loan repaid, anniversaries, goal / threshold attainment)

Employment Cycle

goal / threshold attainment)

Big news

Management transitions

Reaction to employee survey


Survey Results

Company X YZ compared to the database

70%

80%

90%

100%ideological cynics

situational cynics

0%

10%

20%

30%

40%

50%

60%

DB Average Company XYZ Average

neutral employees

believers

3. Who Communicates

Desired Characteristics

• Knowledgeable

• Able to “speak into the listening”

• Credible

• Persuasive

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3. Who Communicates

• Senior mangers

• Seller

• Outside directors

• ESOP trustee

• Service providers

• Middle managers

• Non-managers

• Employee committees

• The whole company• Service providers

(valuation firm, administration firm, legal counsel)

• Financial planner

• People from other ESOP companies

• The NCEO

3. WHAT Communicates

• Compensation system

• Promotions / job evaluations

• Incentive program

• Cutting an ESOP check to a retiree

• Rumor mill

Sill b li i• Silly symbolic issues

• External advertising

Advertising

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4. Common communications pitfalls

• Neglecting middle managers / supervisors

• “Selling” the ESOP

• Doing the “ESOP sprint” – it’s a marathon

• One-way communications

Some Keys to Effective Training

• Build it into job expectations• Hold employees and managers accountable• Measure it• Multichannel approach• Selective use of peer-to-peer training• Coherent progression of content over multiple sessions• Exploit teachable momentsp

“Everyone has heard the saying, ‘you can lead a horse to water, but you can’t make it drink.’ We agree, but we want to do everything we can to make the horse realize it’s thirsty.”

— Dick Rue, CFO of ITAGroup(Employee Ownership Report, Nov.

2006)

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Newsletter Brownbag Cascade Annual Mtg Orientatn 3-month Participatn Full Vestg

ESOP Transaction 4 min.

ESOP Value 2 per year 1 per year 10 min. 2 min. 4 min. 4 min.


The ESOP Communication Grid

ESOP MechanicsHard Facts 1 per year 2 per year 2 min. 5 min. 2 min.

Participation 1 per year 2 per year 1 min. 2 min.

Contribution / Allocation 2 per year 4 per year 1 per year 10 min. 1 min. 4 min.

Vesting / Distribution 1 per year 4 per year 2 min. 10 min.

Taxation 1 per year 2 per year 1 min. 3 min.

Diversification 1 per year 1 min. 1 min.

Voting / Governance 2 per year 5 min. 2 min. 2 min.

Account Statements 1 per year 2 per year 10 min. 2 min.


Steps to make your own grid1. Brainstorm content onto post-its2. Sort each post-it into a category / categories3. Determine chronology for employment cycle items

periodicperiodic


ESOP Communications Sourcebook

The Ownership Edge

Webinars, Seminars, and the Annual Conference

www.nceo.org/events

Give us a call!

510-208-1300

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Loren RodgersProject Director

National Center for Employee OwnershipOakland, CA 94612

510-208-1300

Questions?

email: [email protected]