Employees as owners. A novel concept for most companies, right? But employee stock ownership plans (ESOPs) are becoming more attractive to prospective employees, not only because of the financial benefits, but also because of the culture of employee ownership helps enable.
What is an ESOP?
ESOP companies such as our firm, West Monroe, are 100% employee-owned, which means that our employee-owners participate in the equity growth of the firm. As an employee, you’re enrolled in the plan, which provides annual allocations of stock based upon salary and tenure which vest over a few years. Employees incur no out of pocket expense to receive shares. While the concept of employee ownership has been around since the founding of the country, the legal framework for today’s employee stock ownership plans was first established in 1974 and have grown in popularity since then. As of 2017, there were 6,717 ESOPs in the states covering 14 million participants, and that figure is continuing to rise.
Why do companies choose to convert to employee ownership?
In an era where employers are shunning pensions, employees at employee-owned companies have a more secure retirement. One study showed that S corporate ESOP plan participants had account balances three-to-five times higher than average 401(k) plan participates. Nearly twice as many ESOP retirees feel they have enough money to retire comfortably compared to all US retirees.
The impact of employee ownership is particularly powerful for millennials who are often still paying student loans. According to a recent survey, two-thirds of millennials working at employee-owned firms expect to retire before age 65 – twice the number of millennials at non employee-owned firms. According to Zogby Strategies, 56 percent of millennial employee-owners had at least six months’ salary saved for retirement while 66 percent of millennials at non-employee owned firms had no savings at all.
But providing a retirement benefit to employees is not the primary reason companies choose to convert to an employee-ownership model. There are both financial benefits and cultural benefits for having a shared incentive program.
It’s well documented that employee-owned firms are more profitable than their shareholder-owned counterparts – in good times and in bad. Last year’s ESOP Association survey showed that ‘employee-owned businesses surpass conventionally owned companies at riding out tough economic times like recessions…19% of respondents saw profits rise 40% or more.
Employee owned firms who have opted for the 100% S-CORP ESOP also pay no federal corporate income tax, creating additional cash flow for the business and providing capital that supports rapid growth.
Most significantly, employee-ownership help drive a unique culture of accountability, ownership and stewardship that is very different from a traditional corporation. In fact, it’s this strong culture that likely leads to employee-owned firms being so profitable compared to their counterparts.
I remember sitting down with my manager when I was new to the firm, and mentioned a couple of things that I thought could be improved, and so I asked her ‘who do I speak to in order to make this change? And she looked right at me, and he said ‘if you have a passion for it, and you want to see it change, that’s your right as an owner,’ and I love that.
Noah Fletcher, Director, Operations Excellence
Here are three ways employee-ownership creates a different workplace experience, and how it benefits employee-owners:
Organizational cohesion and trust
With employee-ownership, “think like an owner” is not just a trite motivational phrase– effort put in now can mean employees can seriously reap financial benefits in the future.
This individuation of ownership has had dramatic effects at West Monroe, leading to a genuine shared sense of responsibility and cohesion. As one employee states in the video above ‘I love having this team feeling, that we’re all owners and we’re all working to improve the firm for the long term’. And that sense of inclusion in the ownership-culture begins on a day one – not 10 to 15 years later like it does in a traditional partnership model.
How has this happened? I believe it comes down to the ‘abundance mindset’ prevalent in our leaders from the outset. Our leaders want to share our successes with our team and empower them with a sense of ownership. Full transparency of operating and financial results and shared outcomes engenders a sense of trust in your colleagues, the company, and its leadership. West Monroe has seen sustained, double-digit growth, so the results certainly speak for themselves.
A sense of stewardship
There are measurable effects on the “investor” mindset of the employees, too. Unlike other professional services firms, where the equity is concentrated with the top partners, all employees at West Monroe own a piece of the business. When it comes to small things like whether to expense the Uber Black or get a cheaper ride, we’re noticing that employees are acting like they’re spending their own money–so it makes an impact at all levels. It also changes the mindset on client service – responding to that urgent client request is being responsive to “our client,” not the firm’s client. Our people are willing to go that extra mile for client service, even when they are very busy, because they know the financial results accrue to them.
Like a business owner and steward of the success of the firm, employee-owners consider how everyday choices might impact the financial health of the organization, minimizing risk wherever possible, investing where it makes sense and keeping an eagle eye on profitability.
Motivation to succeed
By aligning the interests between leadership and employees under employee ownership, creativity and leadership can thrive. When you know you’re working together to grow the company in which you have a meaningful financial investment, you’re much more likely to be emotionally invested. Ownership-led businesses usually have a strong culture of entrepreneurship, offering leadership programs and the chance to affect organizational change in a tangible, direct way. For those seeking the opportunity to be hands-on like an entrepreneur, but don’t want to give up the security and stability of a salaried role at an established company, employee-ownership offers the best of both worlds.
As employee-owners, our team puts their heart into what they do— taking care of clients, continuously applying innovative thinking, and striving to do better for our firm and the communities where we are located. Employee-ownership creates a distinct motivation in all of us to succeed.
When it comes to the long-term future of employee-owned businesses, the value is clear to see. The financial and commercial benefits are plentiful, but it’s the culture of employee ownership that really gives meaningful competitive edge for employers and retirement security for their employee-owners.