Employee stock ownership plans (ESOPs) represent a powerful and versatile business ownership transition tool with unique, proven benefits that promote employee engagement, satisfaction, and retention. In fact, a study conducted by the National Center for Employee Ownership with the support of the Employee-Owned S Corporations of America found that ESOPs reported voluntary quit rates of about a third of the national average.
That’s not all: The ESOP-owned S corps experienced layoffs at just a quarter of the national average rate. Employee-owner loyalty certainly has to do with ESOPs’ retirement benefits, but there’s more to the story.
Well-managed ESOPs encourage employees to think and act like owners, to drive efficiencies and minimize waste, and to innovate in products and services they offer. That adds up to competitive advantages that support long-term, sustainable business growth.
Even so, as ESOPs mature, they may encounter unique challenges and opportunities, particularly in managing evolving employee demographics — both from an administrative perspective and from a cultural one.
Here, we’ll explore these dynamics and offer insights for mature ESOP companies to navigate these changes effectively.
Understanding Demographic Shifts in Mature ESOPs
What’s meant by a “mature” ESOP? It’s a plan that’s been in place for a significant period — at least several years — and has reached a stage where the initial debt incurred to buy company shares has been substantially paid down or paid off.
At this stage, the company’s higher employee retention rates can lead to the development of a workforce with a much longer tenure than comparable, non-ESOP companies may have. While the stability can be incredibly beneficial, the demographic shift can create ESOP-related challenges. In particular, it can be challenging to manage the distribution of benefits among a workforce that includes both long-tenured employees with substantial account balances and newer employees with smaller accounts.
Mature ESOPs need to address issues like rebalancing ownership, anticipating and handling repurchase obligations, and sustaining a culture of employee ownership even as the original, “first-generation” employee-owners retire and depart.
Integrating New Employee-Owners Into an Ownership Culture
As long-tenured employees leave and/or business growth brings more new employees into an ESOP, it’s up to leadership to ensure new hires understand what it means to become employee-owners. Some of the most successful ESOPs we’ve seen start the ESOP education process early.
Just how early? It often begins at the job posting.
Educating job candidates about the ways an ESOP can benefit them — in terms of both individual retirement wealth potential and day-to-day job satisfaction — is one way to start leveraging employee ownership early and often. Candidates who understand what’s at stake, even if they don’t become hires, can help drive demand for meaningful employee benefits, and that can help strengthen the perceived value of the ESOP benefit.
Targeted onboarding communications are equally important to help set and manage expectations, and prepare new hires to flourish as employee-owners. Enlisting long-tenured employees to mentor new hires and encouraging participation in a culture and communications committee can also help ensure that new employees grow to become as engaged with the ESOP as their “first-generation” colleagues.
Second-Generation ESOP Employees: A New Perspective
Those “second-gen” employees who join the company after the ESOP has been well established may bring some new and different perspectives on ESOP participation. Unlike those who experienced the transition from closely-held private ownership to employee ownership, newer hires enter an already established structure.
It’s important to understand how their motivations may differ from older employees, and tailor communications and education so that they also embrace the responsibilities that come with employee ownership. This can take many forms, from educating new hires on the basics of business accounting and finances to helping them keep an eye out for waste and inefficiency in their individual tasks.
Strategies for Addressing an ESOP’s Demographic Changes
Recycling, releveraging, reshuffling, and rebalancing are all strategies used to maintain mature, sustainable ESOPs over the long term.
Releveraging, on the other hand, involves taking on new debt to repurchase shares from existing participants. It’s an important option to help ESOPs manage share availability and maintain a vibrant ESOP and an engaged workforce, and can be useful for making share repurchases and distribution payments. Releveraging requires a plan for responsible debt management — something that’s typically already proven in a mature ESOP.
Recycling involves reusing shares that are repurchased from departing employees, and reallocating the shares to current employees. Recycling provides a way to sustain the ESOP and manage share scarcity without issuing new stock. This strategy requires sufficient cash flow to meet the repurchase obligation as employees depart without diluting share value or increasing the company’s debt.
Reshuffling and rebalancing are also tools in the mature ESOP’s arsenal — and we wrote an in-depth blog post explaining their proactive, prudent use here.
Aligning Incentives with Company Goals
Managing demographic change can require additional strategies to align employee incentives with company goals, even as industry landscapes change. Aligning employees’ motivations with company growth objectives can require a reassessment of the plan document to ensure allocation formulas still hold up.
Mature ESOP companies also need to consider generational differences in employee needs and expectations — and here, we don’t mean “first-generation” ESOP employees versus subsequent, post-ESOP hires, but actual demographic generational cutoffs. That’s because people are shaped by their experiences, and different generational groups have been exposed to different challenges and opportunities.
ESOP companies that go the extra mile to understand differences across employee demographic groups can more proactively integrate new talent and engage new employees. As the workforce evolves, addressing distinct motivations across generations is key. For a deeper dive into the ways ESOP leaders can align complex, diverse needs of multiple generations, download our infographic. This free resource provides insights and tips on navigating intergenerational dynamics in your mature ESOP setting. Click below for your personal copy.
