Thursday, June 16, 2011

ESOPs: Unsung Tools for Co-ops

I recently had a discussion with a colleague, and commented that rich executives had abused power and influence to establish their highly concentrated and monopolistic positions in the economy.  My colleague responded that they had expressed their intelligence and talent legitimately, and if others were deserving of success, they would achieve their success in the same way.

      The superficial logic of my colleagues position is based on a narrow range of experience and study, and follows the conventional thought promoted by the prevailing actors in mainstream media.  In considering the nature of her sources of information, I have begun to reflect on an alternative information presentation as a base for constructive dialogue.  Here are some selections from articles I just collected:

Employee Stock Ownership Plans (ESOP)
    Uploaded by london28 (20) on Dec 10, 2004

....There are benefits to both the employer and employees in having an ESOP.

Some of these benefits to the employer are:

1. ESOP allows an employer to indirectly borrow money from a bank and repay the loan with fully deductible repayment amounts.
2. Company can sell its stock and redeem it without reducing the true value of the stock.
3. The company can increase its working capital, cash flow, and net worth..
4. An ESOP assists in establishing and maintaining a stable, high performance workforce.
5. It can act as a medium to retain desired employees.
6. An ESOP can be a decisive factor in motivating employees and building loyalty.

As stated above an ESOP is also beneficial to employees as well, some of these benefits include:

1. Participation in any ESOP gives employees equity opportunities with no cash investment.
2. Employees have a chance to voice their views at the policy making levels of the organization.
3. Employees pay no tax on stock until distribution is made.
4. ESOP increases motivation by directly relating the value of their retirement benefit to the value of the shares of stock allocated to their account.

In 1986 there were approximately 8000 companies which had ESOPs with equity into the hands of approximately 11 million employees. Today there are over 11,000 companies, including big companies such as United Air Lines, PepsiCo, Merck, Bristol-Myers Squibb, Bank of America, Chase Manhattan, and Starbucks, who have ESOP putting about $1 trillion in equity into the hands of approximately 17 million employees. Statistics show that companies with Employee Stock Ownership Plans are 1.5 times as profitable as comparable conventionally owned companies. One such success story has been that of Starbucks.

When Howard Schultz bough the company and took over as a CEO in 1987, Starbucks was a local business with 6 stores and less than 100 employees. Schultz wanted the employees to have a chance to share in the benefits of growth, and to make clear the connection between their contribution and growing value of the company. Keeping this in mind his goal was to link shareholder value with long term rewards for his employees and thus giving employees a chance to create their own value. In 1991 Starbucks introduced the “bean stock” option to the employees. Even with no guarantee that the option would ever be worth anything, “bean stock” affected peoples attitudes and performance immediately. They started coming up with innovative ideas about how to cut cost, to increase sales, to create value and the most important they spoke to the customers from the heart as partners in the business. Six years later, after the introduction of “bean stock”, in 1997 Starbucks had more than 13,000 stores and 25,000 employees with stores in cities all over North America as well as in Tokyo and Singapore. Starbucks sales and profits have grown by more than 50% a year for 6 consecutive years. According to Schultz, Starbucks’ secret weapon has been giving stock options to everyone, from managers to baristas. Schultz believes that giving stock options helps the employees to see a connection between their work and Startbucks’ fortune.

Statistics show over and over that ESOPs increase profitability and help retain talent. Besides Startbucks couple of such examples are that of United Air Lines (UAL) and Texas Instrument (TI). In 1994, UAL corp., in exchange for steep pay cuts introduced ESOP. According to Captain Curtin of UAL “what he as seen is record $4.9 billion swap; uninterrupted labor peace, job security, worker clout in the boardroom, and expanding air line that is the worlds largest and often, most profitable, and a retirement nest egg fro 80000 present and past employees”. Similarly, TI was faced with a problem of losing top technical talent to the competition. As a result TI introduced stock options to target most talented employees. The company gave managers the authority to grant stock options to their best performers and as a result there was 8% decrease in turnover in key jobs in five years.   /  Overviewing the success story of Starbuck and past surveys we can conclude that a major reason for the profitability of companies is significant amount of employee ownership along with the kind of management that first entertains employee ownership ideas, and then implements them and makes them work. Managers with such views and interests may also be the kinds of managers who lead their organizations in attaining significant shares of their markets and high levels of profitability, Howard Schultz is an excellent example of such a CEO. As he says “If I hang my hat on one thing that makes Starbucks stand out above other companies, it would be the introduction of “bean stock”. With its introduction we turned every employee of Starbucks into a partner. I wanted to find a way to share both the ownership of the company and the rewards of financial success with the people of Starbucks”.

Publix Supermarkets Tops Employee Ownership 100 List
Publix Supermarkets continues to be the largest majority employee-owned company in the U.S. and, almost certainly, the world. It employs over 120,000 employees in over 800 stores in five Southern states. It consistently shows up on lists of the most admired companies and best places to work, and, year after year, has the highest customer satisfaction scores of any supermarket (and sometimes of any kind of business, period). Publix was started with one store in Florida in 1930. Employee ownership goes back to 1945, when founder George Jenkins created a share bonus and stock purchase plan for all full-time employees. In 1980, an ESOP was set up, with annual contributions around 10% of pay. Employees can also buy stock in the 401(k) plan and, since 1959, a stock purchase plan. Only Publix employees can buy stock, and 100% of Publix is owned by the various plans. The company's stock has far outperformed the market, and a typical associate would earn twice one year's pay over 10 years in the ESOP. The Publix culture is very focused on extraordinary customer service, as its awards would suggest. Anecdotes about some of the more remarkable examples of devotion to customer service can be found in a new book, The Story of Customer Service at Publix, by Joe Carvin, former HR manager at the company.  /
p.1  On a rainy business trip to Florida recently, I got up early and put on my Gore-Tex running outfit to go out for my morning jog. After showering, I threw my Crest Toothpaste into a bag and hurried over to Starbucks for coffee and a pastry. I needed to catch my Southwest Airlines flight soon, but I left my razor at home, so I rushed into the Publix Supermarkets and picked one up. It was going to be a long day, but I felt good that all the products and services I'd used so far had come from companies where the employees were substantial or principal owners.  /  .... during the last decade, the number of companies sharing ownership broadly with employees has grown substantially. While precise numbers are not available, we estimate that as of 2009 about 9 million employees had stock options, restricted stock, phantom stock, and/or stock appreciation rights. There are about 11,500 ESOPs in the U.S. covering almost 14 million participants and controlling several hundred billion in assets. Of these, about 5% are in publicly traded companies and 95% in closely held firms. The median percentage ownership for ESOPs in public firms is about 10-15%. Most public firms maintain an ESOP along with other benefit plans. The median percentage ownership for private firms is about 30-40%, with about 3,000 companies now majority employee owned.....  /  A significant number of companies provide stock options or other kinds of individual equity to most or all employees. Google, Southwest Airlines, and, Starbucks are among the better known examples.....
p.7 ....At United Airlines, for instance, employee task teams were formed soon after the employees purchased the company. Over the ensuing two years, the teams took apart every aspect of the business, making recommendations for often substantial changes. The teams were appointed to include a broad cross-section of employees, but anyone could volunteer to join one. The ideas helped generate hundreds of millions of dollars in cost savings and new revenues. Ironically, when the teams completed their work, management backed away from the idea of participation, causing the airline some well-reported difficulties in the years that followed. The ESOP is now frozen and both most managers and employees feel that it was not a success. United shows clearly that just setting up an ESOP, and even starting off in the right direction, is not enough. Companies must commit to a long-term ownership culture program.

Stone Construction Equipment Company in Honoeye, NY is a good example. It set up an ESOP set up in the late 1970s was having little impact. Then the company hired a new president, Bob Fien, who started a participative management program. Eventually, all employees were trained in "just-in-time" management and organized into work cells that schedule and control their own work flow and have considerable input into the design and organization of their jobs. Stone had been limping along and had developed a reputation for poor quality; by 1991, the company had made so much progress Industry Week named it one of America's top 10 manufacturers.   /  At Springfield ReManufacturing in Springfield, Missouri, employee owners are taught to read detailed financial and production data. Meeting in work groups, they go over the numbers then figure out ways to improve them. Employees are sometimes given 90-page financial statements to digest. Springfield's stock went from 10 cents a share when it started its ESOP in 1983 to $21.00 in 1994. Employment increased over 500%.
Other approaches include employee advisory committees to management, eliminating levels of supervision while giving non-management employees more authority, meetings between management and randomly selected groups of employees, suggestion boxes, and anything else companies can imagine to get people involved.  / This "high-involvement" management style has, of course, become conventional wisdom, if still unconventional practice, at many companies. Is ownership really essential to make it work? There are no conclusive data on this, but there is good reason to believe that ownership, if not essential, is at least highly desirable. First, ownership is a cumulative benefit. Each additional year, an employee has more and more at stake in how well the company performs. It is not unusual in mature plans for the appreciation in share value and employer contributions to add up to 30% to 50% or more of pay in a year. In profit sharing or gainsharing, both of which are paid periodically and almost always amount to a small portion of total compensation, the benefit always remains relatively minor. Second, ownership has a stronger emotive appeal. People may be very proud to say they are an owner; few would brag to friends they are a profit-sharer. Finally, only ownership encourages people to think about all aspects of a business, not just short term profits or some efficiency measure. This is especially important in companies moving towards open-book management systems./
The key for the success of “positive corporate governance,” as envisioned by McConvill might be for organizations such as the Business Roundtable to hold up as an ideal for executive pay CEOs like Costco’s Jim Sinegal. Last year he earned a salary is just $350,000, plus a $200,000 bonus. Costco’s average pay for employees is $17 an hour; 42% higher than its rival Sam’s Club. By many measures, including its health plan, Costco’s model is more sustainable, in terms of treating its employees, host communities and even its shareholders better in the long run than Wal-Mart. [(How Costco Became the Anti-Wal-Mart, NYTimes, 7/17/2005) (Disclosure: The reviewer is a Costco shareholder)]....  /  McConvill says he does not attempt to construct a new pay-setting approach, although he suggests “best practice” might tie executive compensation to “15-20 times average weekly earnings” of employees. He also cites a study in New South Wales that found excessively high pay levels for CEOs coincide with lower corporate earnings. Christopher Mann of Moody’s recently authored a report that found businesses that offer their CEOs unusually large bonuses or option plans have higher bond-default rates and more frequent and deeper rating downgrades than their peers, (Report Links Defaults, Excessive CEO Pay, /

On 81st birthday, Oregon man gives company to employees

By DANA TIMS  The Oregonian  MILWAUKIE, Ore. — Scores of employees gathered to help Bob Moore celebrate his 81st birthday this week at the company that bears his name, Bob's Red Mill Natural Foods. /  Moore, whose mutual love of healthful eating and old-world technologies spawned an internationally distributed line of products, responded with a gift of his own — the whole company. The Employee Stock Ownership Plan that Moore unveiled means that his 209 employees now own the place and its 400 offerings of stone-ground flours, cereals and bread mixes.  /  "This is Bob taking care of us," said Lori Sobelson, who helps run the business' retail operation. "He expects a lot out of us, but really gives us the world in return."  /  Moore declined to say how much he thinks the company is worth. In 2004, however, one business publication estimated that year's revenue at more than $24 million. A company news release issued this week stated that Bob's Red Mill has chalked up an annual growth rate of between 20 percent and 30 percent every year since.  ..../
Our story goes something like this:  Forty years ago, Berkeley's now-famous cooperative, the Cheeseboard, opened its doors. In 1997, inspired by their own success, they helped open another bakery based on cooperative principles. Arizmendi Oakland debuted that year on Lakeshore Avenue, named after the Basque labor organizer. endeavor was a hit, so what next? They decided to open another bakery, this time in San Francisco. Once again the group, along with members of the Oakland store, graciously imparted their knowledge of cooperative business practices and shared secrets of their recipes.
In October of 2000, Arizmendi Bakery San Francisco was born. The Cheeseboard's gift to us has become our gift to the neighborhood.
Published on Sunday, April 18, 2010 /Last updated on Tuesday, April 27, 2010 Arizmendi's baked goods. Photographs by Tony Nguyen.Mention ‘Arizmendi’ to most Bay Area bread lovers and watch their eyes glaze over as they recall the intoxicating aromas and scrumptious flavors of artisan breads, pastries, cookies and pizzas. Yet as heavenly as these lovingly hand-crafted baked goods are, there’s more that sets Arizmendi bakeries apart from the rest.
Each bakery is a cooperative, owned by its workers or members and democratically operated........ Victor Hernandez, a member of Arizmendi in Oakland for three years, serves on the Policy Council and is a member of the DSC. Every Friday he trains workers at the new bakery in San Raphael and tries to impart Arizmendi’s co-op philosophy. He said he compares the culture of the co-op to that of a family.  //  “It’s like a mom and dad: If they love each other, the kids will be taken care of. The members are the parents, the bakery is the kid,” he said.
According to Hernandez, although both the recipes and business model have proven to be successful, new workers have to get used to the co-op's culture. Hernandez said members learn to compromise and respect each other's skills. The underlying philosophy is that members' working styles and speed aren’t being measured, and that everyone is an equal and completes their work in their own way.  //  Jessica Brogdon, a member at Arizmendi in Oakland for eight years, said she believes the food quality stays high because everyone has an equal stake.  //  “It’s your business. You take more responsibility when you’re working for yourself," she explained.
Hernandez said most of the 26 members have been there about eight years and there is little turnover. Committees focus on various aspects of the business, such as production, benefits and grievances. Any worker can serve on a committee; a general meeting, led by a member-facilitator, is held once a month.
New members must be approved by 90 percent of the co-op after serving a six-month candidacy period to see how well they mesh with other owners. A new member pays $3,000 for his or her share of the business. Rather than pay that money upfront, the cost is deducted gradually from wages, typically $50 from each paycheck.  //  How does the group select new members? It’s not all about the work, Hernandez explained, “but how the candidate fits in and gets along with the group. Although ‘Heart’ isn’t on the application," it's an intangible that matters. The team asks "How dedicated are they? How much do they care about the person they’re working with?" in making their decisions.
In additional to being equitable, Arizmendi's baked goods (including the pizzas) are super-delicious. /

PepsiCo shares power and stock with workers

Article Abstract:
PepsiCo Inc. was given the 1995 Personnel Journal Optimas Award for service. The beverage, fast-food and snack giant has a strong entrepreneurial culture that stresses individual contribution in a small-firm environment. This mind-set is nourished through an employee stock option plan (ESOP) design to reward service, increase shareholder value and empower all employees. The firm's human resources staff examined many ESOPs in other firms but found that these tended to include top management only, replace other benefit programs and act as an entitlement more than as an incentive plan. PepsiCo approached its ESOP from a different perspective and opened it to all full-time employees over and above their regular compensation and benefits package. The resulting plan, Share-Power, grants stock options every year to workers based on 10% of their total yearly pay. The program serves as a strong incentive for entrepreneurship by resulting in sizable returns.

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