Should Employees Jump At The Chance For Company Stock?

Should Employees Jump At The Chance For Company Stock?

New research shows that in the wake of the Great Recession, companies that offer employee stock ownership plans (ESOPs) have fared significantly better than those that don’t. And experts say in the coming months and years, as Baby Boomers who own companies begin looking for exit strategies, more companies will open ESOPs, which essentially allow employees to own shares in the company, profiting from its success (and sharing in the risks of business ownership).

So if you happen to be employed at one of these companies that starts rolling out an ESOP, that’s great news, right? Not so fast. It could be terrific news, if you’re employed by a growing company with a strong management team in place. But in some cases, ESOPs can go south, taking employees’ retirement funds with them, says Renee Fellman, a turnaround expert who has helped turn around ESOPs at manufacturing firms.

Based on her experience at a couple of firms, Fellman knows that sometimes, ESOPs are set up improperly or unfairly: For instance, at one firm, the same attorney represented both the owner and the employees, a major no-no according to ESOP experts like Kyle Coltman, managing director of SES Advisors, Inc., who has designed and implemented more than 500 ESOPs.

Recently, I talked with Fellman to find out what employees should know before jumping headlong into an ESOP. “An ESOP is simply an investment vehicle, and whether or not it makes sense depends, to a large extent, on whether or not the company in question can be successful,” Fellman says.

In many cases, ESOPs require no monetary investment from employees; you can be vested in the program after a certain length of service at the company. However, “it’s still an investment no matter what, and it’s more serious if it’s going to be your retirement plan,” Fellman says. To be successful, she says all ESOP companies need the following characteristics:

  • A capable, experienced leader who understands all aspects of running a company, including marketing, finance, operations and administration.
  • A sound, carefully conceived and written business plan.
  • A clear definition of job roles and responsibilities.
  • A method for ensuring accountability throughout the organization. (In one company Fellman worked with, the ESOP trustees appointed the board of directors and the board of directors appointed the trustees — there was no accountability because everybody in a leadership position was beholden to everybody else in a leadership position.)

If you have the option to become an employee-owner but aren’t sure whether to jump at the chance, talk to the attorneys and business consultants who are managing the plan for your company. Fellman recommends asking yourself and those experts questions like:

  • Is the industry you’re in growing or shrinking?
  • Have the company’s profits increased or decreased over the past three to five years?
  • Is the owner offering ownership in the company to employees only because he or she has tried unsuccessfully to sell the company to outsiders?
  • Has the company operated by a business plan? If so, what was the most recent plan, and were the goals achieved?
  • What provisions have been made to ensure that the new leadership is well qualified?
  • To whom will the new president/CEO report?
  • Are the employees and the owner represented by separate attorneys in the ESOP transaction?
  • Can I afford to lose my investment?

Is an ESOP or other ownership plan available at your company? If it was, would you jump at the chance to be an owner?

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