As business owners, there is a lot to consider when mapping out future retirement and succession plans. Between 401(k)s, Individual Retirement Arrangements (IRAs), Employee Stock Ownership Plans (ESOPs) and other similar options, weighing the advantages and disadvantages of each one is critical. While plans such as 401(k)s and IRAs are most common, there is still a large knowledge gap when it comes to ESOPs – and because of this, the ESOP option frequently gets overlooked or viewed as a ‘last-resort.’
With that said, let’s dive into some of the great benefits that ESOPs bring to both employers and employees, and discuss why ESOPs should truly be viewed as a first-resort.
For starters – what is an ESOP?
To keep it simple, companies that launch an ESOP form a trust that purchases some or all of the company’s shares and holds them in retirement accounts for employees. As the stock value increases or decreases over time, so too does the value of the employees’ accounts.
The two main reasons why ESOPs are such beneficial alternatives to the other succession plans out there are as follows:
- ESOPs increase employee engagement, thus improving the company’s overall performance
- ESOPs offer potentially compelling benefits at the time of sale
Employee Engagement
In terms of employee engagement, studies have shown that employees who participate in an ESOP are more motivated to perform at a higher level than those who do not participate in an ESOP. Research in a study conducted on the effects of ESOP adoption and employee ownership at the University of Pennsylvania showed that individual employee-owners have increased job satisfaction, organizational commitment, motivation and workplace participation. Employee ownership has also been shown to result in increased firm productivity, profitability and longevity. In the largest study on the performance of employee stock ownership plans, Joseph Blasi and Douglas Kruse found that overall, productivity increased by 4% in companies who participate in an ESOP. The National Center for Employee Ownership also found that on average, employee-owners have retirement accounts that are 2.2x larger than those in traditionally owned companies.
Compelling Benefits
The second reason why ESOPs are a great option for business owners is the increased optionality. When the time comes to sell a business, ESOPs give business owners more than one solution to a very complex situation. One example of this can be seen through the decision Dansko, a popular manufacturer of shoes, made to become an employee owned company. When owner Mandy Cabot made the decision to sell her company, she was presented with an offer from Timberland, another massive name in the industry. While the deal offered an attractive price tag and additional benefits like added R&D for Dansko, ultimately Mandy sold her shares to an ESOP. Instead of an outside company running her business, the employee owners who have been ingrained in Dansko’s roots for so long, will continue on with their original commitment to employees, community, and values.
“In any business, employees are the life-blood, they ARE the business,” Mandy said. “Through our employees, Dansko will learn, evolve, and regenerate itself virtually forever.”
Misconceptions of ESOPs
With these benefits laid out on the table, what then gets in the way of owners looking to implement this viable option? Here are some of the major misconceptions surrounding ESOPs:
- An owner may not get fair market value by selling to an ESOP – It is true that an ESOP cannot pay MORE than a business’ fair market value – thus, an owner will not be walking away with an offer from the highest bidder. However, the ESOP can pay every dollar of fair market value determined by a market evaluation exercise.
- Owners lose operating control of their companies when they create an ESOP – This is also not true. While employee-owners will observe management decisions and strategies to grow the value of the company, ESOP members don’t manage operations.
- ESOPs are too complex – Although there are more nuances when it comes to setting up an ESOP, ESOPs are structured under U.S. law as an employee retirement plan. There are many financial advisors out there who are experts on the ins and outs of ESOPs.
In the end, some retirement options may be better suited for certain companies and firms – but at the least, be sure to evaluate the tangible benefits of an ESOP.
Tata & Howard adopted an Employee Stock Ownership Plan in October of 2014 to ensure future success of the company. As a result, Tata & Howard employees own 100% of the company through their ESOP. Since becoming an ESOP company, Tata & Howard still upholds the same core mission and values of teamwork, efficient solutions, client satisfaction, integrity, and positive attitude, originally established more than 27 years ago.
Using ordinary office supplies (plus an uncooked chicken egg), to build their egg protective packages, teams could use as many or as few of the materials and were free to cut, tear, or break any of the pieces. The time to create the egg structures lasted 20 minutes. After the creating phase was over, it was time to drop the eggs.
From the second floor of our Waterbury, CT office, two teams dropped their eggs onto the sidewalk below. Upon closer examination, not one of the eggs survived the fall. In the case of a tie, as in this case since both eggs broke on impact, the team using the least amount of materials was declared the winners. Congratulations to Chelsea, Will, Kevin and Sal who used fewer pieces in the design of their egg packages.
Those three teams then ventured to the third floor and dropped their eggs again. Sadly, none of the eggs survived the fall from the nearly 30-foot fall. And, although many of the egg structures were still intact, it was clear from the misshapen, leaking packages, the eggs broke on contact. Fortunately, there was very little mess to clean up since the eggs were all overly wrapped and packaged. It was a tough call, but team Chris and Chrissie shared the winning honors.
The materials used for the egg drop challenge can be whatever you choose. We opted to use common items found around the office. Of course, don’t forget the egg!
Tata & Howard is a 100% employee-owned company, or ESOP. Being an ESOP is an integral part of our corporate culture, and we consistently strive to enhance our core values of teamwork, innovative solutions, positive attitude, efficiency, and integrity through teambuilding activities throughout the year. October is ESOP Month, celebrated by ESOP companies across the United States, and an excellent time for all of us at Tata & Howard to focus on the benefits of employee-ownership as well as the core values that have been with us since our inception in 1992.
After completing the scavenger hunt, EOs headed over to the Union Oyster House, the oldest restaurant in the United States, where we enjoyed appetizers and drinks in a private room. Once everyone had arrived, a theater troupe from Monson, MA (one of our clients!) began their performance of Trial & Error, a hilarious interactive show that takes place in a courtroom. Each act was given between courses, and the laughter could be heard throughout the restaurant. At the end of the night, we cut into our special 25th anniversary cake and savored the sweet taste of success. The night was highly enjoyable and a true celebration of our firm’s incredible accomplishments.
During the last week of ESOP Month, EOs participated in a step competition, sponsored by our Wellness Committee. The team with the highest total steps as well as the team with the most participation would receive points for their houses. Over half the company participated, and collectively we racked up an astounding 1,754,372 steps! That’s the equivalent of walking from Marlborough, Massachusetts to Cincinnati, Ohio.
As a 100% employee-owned company, Tata & Howard has a unique culture that celebrates teamwork, efficiency, integrity, positivity, philanthropy, sustainability, and yes, even fun. ESOP Month is celebrated by ESOP companies throughout the United States in October each year, and it serves as an excellent reminder of the many reasons why being part of an ESOP is such an exciting opportunity. Throughout the month, employee-owners (EOs) participate in challenges, activities, educational sessions, and philanthropic initiatives that embody the essence of ESOP culture and serve to remind EOs of the incredible benefits realized by being part of an ESOP company.
At Tata & Howard, our four ESOP committees – Communications, Green, Philanthropy, and Wellness – got together to plan a month’s worth of festivities. The month kicked off with cider donuts, cider, and coffee in all offices, after which EOs were sorted into houses, Harry Potter style. EOs will stay in their house for the month and houses will collect points based on participation and success in challenges. The house with the most points at the end of the month is declared the winner and receives the House Cup.
Also during week 1, EOs celebrated National Taco Day, which officially fell on October 4. Some offices had a taco potluck and others grabbed tacos from a local restaurant, but all offices enjoyed National Taco Day and spending some downtime together.
Week 2 brought on a whole new set of challenges. EOs participated in a “Minute to Win It” challenge that included building the tallest possible tower out of spaghetti and marshmallows in five minutes, and three one minute challenges including moving piles of index cards by sucking them up with a straw, moving marshmallows with chopsticks, and eating a cookie from one’s forehead without using hands. Needless to say, laughs abounded and we learned who eats a lot of ramen and who has experience with forehead cookie eating! Points were again awarded for both participation and winning challenges.
But team building doesn’t happen by chance; rather, it requires a concentrated effort from employee-owners at all levels in order to build and maintain positive and meaningful relationships. Because of this, Tata & Howard encourages and invests in activities that bring all of us closer together. A large part of our team building comes in the form of our Employee Stock Ownership Plan (ESOP). Since 2014, 100% of the stock in Tata & Howard has been owned by the employees, and since every member of the firm is an owner, the success of the firm becomes much more personal. Just like a football team that must work together to win championships (we might be talking about the Patriots here!), we also work together to deliver the best projects to our clients, enabling us to grow the firm.
We believe that our team is what sets us apart and what makes the firm special, and the firm of choice for innovative solutions in the water environment. From working together on innovative projects — like the recently completed 
2017 marks Tata & Howard’s 25th anniversary year, and in celebration, we are planning a year-worth of activities and special events. Tata & Howard’s doors were officially opened on October 19, 1992 by Don Tata and Paul Howard, who remain active in the firm as Chief Executive Officer and Senior Vice President, respectively, today. Initially a two-person startup, the firm has grown to over 65 employees with nine offices in seven states. And while our services and experience have expanded exponentially since 1992, we remain a niche water firm with deep, targeted expertise in the water environment.
As part of our year-long celebration, we will be implementing several initiatives that focus on our core values and our 
