Do ESOPs Really Increase Productivity? New Research Says Yes.

Welcome to ESOP Radio

0:03

Hi everyone, welcome to ESOP Radio.

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You have both Ben Spadt, and myself, Trevor

0:08

Gilmore today.

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Ben, Let’s kick things off.

NCEO Annual Conference recap

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What have you been up to you lately?

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At the beginning of the month,

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I was in Milwaukee

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at the NCEO annual conference.

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I presented on a repurchase obligation.

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I also met with a bunch of great,

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you know, even advisors in the industry,

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other business partners,

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as well as companies

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that are employee owned

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or looking to be employee owned.

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It was a pretty great experience.

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I think there was,

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what, 2300 people there?

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That was a pretty big event for it.

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Braving the,

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the April chill in Wisconsin.

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Yeah, it was a little blustery one day.

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Yeah. Trevor, what about you?

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What have you been up to lately?

Trevor discusses the Boston Marathon

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Yeah.

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So I attended that same conference

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NCEO and spoke about Esop success,

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what it means today,

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what it means in the future. Good stuff.

0:56

Good questions in the audience.

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And also, I ran the Boston Marathon

1:00

last Monday.

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So Monday, April 20th

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as Patriot’s Day in Boston.

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And this was the 130th

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running of the marathon.

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So I did that and met my goal.

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It was just great.

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And overall

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it was a super epic, well-run marathon.

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So, so grateful to be a part of that.

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Absolutely. Congrats. Thanks.

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Next time I need to wear some,

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you know, ESOP swag.

1:23

There you go. Yeah, I like that.

Rutgers releases major ESOP productivity study

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Yeah.

1:25

So, some exciting news out there

1:27

in the ESOP universe.

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Rutgers, which studies ESOP’s,

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have a think tank over there

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run by Joseph Blasi.

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And they’ve been doing this forever.

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They put out some awesome research lately

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that actually proves that

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ESOP’s do increase productivity.

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So we’ve always talked about this.

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We see in our client base.

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Again, Menke has been doing this

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for 52 years.

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So we have a lot of data

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and a lot of conversations

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with our clients

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over that period of time.

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But now there’s finally an official study

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conducted by university researchers

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that proves this.

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So let’s dive in.

Five key takeaways for ESOP companies

2:00

You know, this

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kind of five key takeaways here

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for all ESOP companies.

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And then there’s also five key

2:06

takeaways for you

2:08

business owners

2:09

considering using an ESOP,

2:11

which we’ll talk about.

2:12

So Ben,

2:12

what are those five for ESOP companies.

2:14

Yeah.

ESOPs increase productivity regardless of management quality

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First and foremost

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I mean, you alluded to it.

2:17

ESOP’s boost productivity.

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And it doesn’t even matter

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about management quality.

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You know,

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you don’t have to have

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a super strong management

2:24

team in place, CFO, SEO, all of that.

2:27

But we’re talking,

2:28

you know, a

2:29

significant, materially

2:31

significant increase in productivity.

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And, you know, you talked about this

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being a university study.

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And I think

2:37

that might be painting to a brush here.

2:40

This is probably the most in-depth study

2:43

that has happened.

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You know, they talked

2:45

about utilizing data

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from the Bureau of Labor Statistics

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that is, you know,

2:50

you have to get a special level

2:51

of clearance to access some of this data.

2:54

So it’s it is a big study.

2:56

But like I said,

2:57

you know, we’re talking about a

2:59

almost a 7% increase in productivity.

3:02

And then

3:03

the researchers even accounted

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for the quality of of workplaces

3:06

management practices

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and what that means

3:09

is that the Esop itself,

3:11

not just being a well-run company,

3:13

but the Esop itself, drives productivity.

3:15

And number two, Trevor,

Why ownership percentage impacts performance

3:17

that when you talk about

3:19

how much the Esop owns matters

3:21

and you want to get into that a little.

3:23

Yeah, absolutely.

3:24

So this study proves

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that the more these are bones

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and the greater the benefit

3:28

the greater the productivity boost.

3:30

So in the study here, higher

3:33

Esop asset balances in the larger Esop a

3:37

how about corresponded to a 25 to 27%

3:41

productivity boost.

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That is huge pays for itself

3:44

and then so on.

3:45

So we’re talking about real ROI here.

3:47

Yeah.

3:48

The larger

3:48

the ownership stake

3:50

that the employees have the bigger

3:51

the productivity.

3:52

And I alluded to this earlier,

ESOPs work across different management structures

3:54

number three,

3:54

that esops

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work across all management quality.

3:58

You know, the entire spectrum

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where the workplace has weak

4:01

or strong management practices.

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You know, we’ve seen

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some and we’ve talked

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about a little before on earlier podcasts

4:07

implementing the iOS system

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in terms of management.

4:13

Some of those you might consider

4:14

a stronger management structure,

4:16

but weaker ones still show

4:18

that productivity, suggesting

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that esops

4:20

may partially compensate

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for less formalized management.

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So it could be take,

4:25

you know, company like Bob’s

4:26

Electric Bob makes all the decisions.

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The esops can,

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you know, increase

4:30

productivity,

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even if we just have a single sole person

4:33

making all the decisions

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or an entirely

4:36

independent management team.

4:38

And then I think,

Why ESOPs work best with bonus incentives

4:39

you know,

4:39

the piece that is

4:41

most important is pairing this

4:43

with other benefits.

4:44

And Trevor, you want to talk about that.

4:45

Absolutely.

4:46

And this is very important

4:47

because the Esop is a long term

4:49

retirement benefit.

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So it is not a current Pan

4:53

set of meaning.

4:54

Hey you’re not going to realize this

4:56

and your W-2 earnings,

4:57

you’re not going to get a check each year

4:58

and so on from the Esop.

5:00

You get a check

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when you either

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leave the company or retire,

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you know, or whatever

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that happens, right? You know?

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And the longer you stay

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and only more equity accrues to you

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and so on, you know,

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becomes a significant part

5:11

of your retirement wealth.

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However, it is

5:14

such a long term incentive.

5:16

So even though it creates a huge,

5:19

you know, boost for workers

5:20

retirement wealth and basically

5:22

how they approach their jobs, you know,

5:24

studies showed

5:25

there’s a tremendous productivity boost

5:27

associated with an Esop.

5:29

Nobody over the long

5:30

run esops tend to work best

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when they also have current pay

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performance incentive plans,

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meaning cash bonuses.

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If you meet certain metrics.

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We also see stock

5:40

appreciation rights plans,

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you know, and so on.

5:42

But combining a current bonus structure

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that’s based on some sort of measure,

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if that makes sense for the business,

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for the group of employees

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in the division

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and so on, combined

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with the Esop work

5:54

best and you’re going

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to get the highest ROI

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because then people

5:57

are going to see, hey,

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I work hard, smart

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and so on,

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and I’m going to get that bonus this year

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and I’m going to see that correspond

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to a higher value

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on my Esop account statement.

6:07

So marrying

6:08

the two makes tremendous sense.

6:10

And the companies in the study and again

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we’re talking about thousands

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of companies in the study.

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And they measured the data for

6:16

I think over 15 years.

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So it’s meaningful data here.

6:20

The productivity boost was about 13%,

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you know, for those companies

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or if I’m about real synergies here.

6:25

Absolutely.

The “now and later” compensation mindset

6:26

And I think yeah, the the

6:27

the now and later kind of mentality

6:29

I get a little bit of a bonus now.

6:31

But a big bonus later

6:32

that really seems to grease the wheels

6:35

a pretty well.

6:36

But even those individuals

6:37

and this leads into number five,

Addressing the ESOP “free rider” problem

6:39

even those individuals

6:40

that perhaps aren’t

6:41

motivated by the Esop.

6:43

We talk about,

6:44

you know,

6:44

we have drivers

6:45

on these construction companies

6:46

that are thinking about fuel costs.

6:48

Those are the people that are

6:49

truly drinking the Kool-Aid, truly

6:51

buying in the ones that aren’t,

6:53

and the ones that sort of just show up

6:56

and do their job.

6:57

You know, the Esop isn’t incentivizing them

7:00

to work harder

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or increase the bottom line.

7:03

They call that the free rider problem.

7:05

It seems to be manageable

7:07

or smaller with esops that it is easier

7:10

to get employees to buy in

7:13

with the overall vision of the company

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if they’re sharing in the success,

7:17

whether it be in the Esop

7:18

or with the Esop.

7:19

And a bonus,

7:21

but it does seem to be minimized

7:23

with an Esop structure.

7:25

And so, you know,

7:26

those are the five bullet points

7:27

that we talked about,

7:28

about from the business

7:29

owners perspective,

7:30

what those takeaways are from this study.

Five takeaways for business owners considering an ESOP

7:32

But what about owners

7:33

considering an Esop.

7:35

Yes I mean it’s five key takeaways.

7:37

So for business owners listening to this

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you know

7:40

that’s a lot of our audience

7:41

here is business owners

7:43

considering their exit options.

7:44

Whether it’s Esop

7:46

whether it’s on a private equity side,

7:48

her strategic competitor,

7:49

you know, you name it,

7:50

or even existing a management.

7:51

So the case for the Esop here

7:53

in terms of productivity is number one

7:55

the productivity case is real.

The productivity case for employee ownership

7:58

You know there’s real data here

7:59

showing there’s a

8:01

corresponding productivity boost.

8:03

If you go Esop go other options.

8:06

There’s not much data show on that.

8:07

Right.

8:07

So this is a proven way

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to increase productivity.

Why companies should keep existing bonus structures

8:11

Next up is

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you should not remove

8:13

your bonus structure

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because you have the Esop

8:16

that might go the other way

8:18

and work against you.

8:19

So keep the existing bonus

8:20

pay structure in place.

8:22

And we always recommend to our clients

8:23

that that would be

8:24

very unusual circumstances

8:26

that let’s say Halo to reduce

8:28

people’s pay because of the Esop. Right.

8:29

Because I tend to send the wrong message.

8:32

And if I could chime in, Trevor,

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you know,

8:34

the last few is outfit analysis analyzes

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that we’ve done

8:39

have included that bonus structure.

8:41

And our business owners

8:42

that are considering Esops.

8:45

Their first question is,

8:46

do I need to get rid of my bonus,

8:48

or can I keep this bonus in place

8:50

because it’s important

8:51

to not only me, but to my employees?

8:53

So we are seeing that a lot

8:54

and we are advising them

8:56

not to take that away

8:57

or not to modify it

8:59

because it is important.

9:00

It goes hand in hand with Esop

9:01

and the employee ownership. Exactly.

9:04

Yeah. It’s employees want to know.

9:05

They get used to obviously a certain

9:07

wage level,

9:08

certain bonus level, you know, and so on.

9:10

And when you start stripping that away,

9:12

you know,

9:12

the messaging changes, and replacing

9:15

especially with a very much

9:16

a long term benefit, it’s like,

9:18

hey, you know,

9:18

you’re swap in something for something

9:20

that it’s going to be way far out.

9:21

So that message doesn’t

9:23

resonate with a lot of employees and the

9:25

and the overall incentive

9:26

for productivity gains, kind of,

9:28

you know, goes away.

9:29

So it takes more try to keep the bonuses

9:32

in overall cash comp structure

9:35

still more.

9:36

And I think that

Transparency and communication with employees

9:37

yeah, Trevor

9:38

I think that teases into the next

9:39

one too about how transparency matters.

9:42

You know, this is the third takeaway

9:43

for business owners considering and Esop

9:46

you know, be transparent.

9:47

And we’re not talking about,

9:48

you know, open up the books to everybody

9:50

but share information.

9:52

Hey we’re considering an Isa.

9:54

Or are just cluing

9:56

these regular frontline workers

9:58

into what

9:59

these key performance

10:01

indicators are, your metrics

10:03

that you use

10:03

to determine profitability,

10:04

health of the company

10:05

and it that independently

10:07

will improve

10:08

productivity

10:09

because people see

10:10

how they fit in with that math.

10:12

And as the Esop structure is designed,

10:15

as you go through our different phases,

10:17

we will show you and kind of clue you in

10:20

how to build that culture,

10:21

how to roll it out to the employees

10:23

and keep them involved with it without,

10:26

you know, giving away

10:28

how the sausage is made, so to speak.

10:30

Absolutely. Transparency matters.

10:32

Focus on the right metrics

10:33

that are relevant for your business,

10:35

not vanity metrics.

10:36

You know that’s crucial.

10:37

The right metrics

10:38

that employees will understand,

10:40

care about, and want to outperform.

Larger ownership stakes create stronger incentives

10:42

Next up is a larger

10:44

ownership stake per employee

10:45

tends to drive a stronger effect.

10:47

And we said this earlier today as well.

10:49

So companies

10:49

that tend to have 100% Esop ownership,

10:52

they’re going to see

10:52

higher productivity boosts

10:53

that a company with 1% ownership.

10:56

You know,

10:56

as you know, overall, the effect

10:59

of working hard, seeing that, return ROI.

11:02

And then of course, the power of 7

11:04

million, investment

11:05

growing at 7% a year is going to double

11:07

for ten years.

11:08

You know, the power of compounding

11:10

that gets smaller at a 1% stake.

11:12

You know, when we take a look at the whole,

11:15

value multiplier

11:16

and so on over time, definitely larger

11:20

stakes tend to drive

11:22

higher productivity gains.

11:24

But that’s not to say there’s an option.

11:26

You start off small

11:27

and then increase that stake over time.

11:29

You know, we see that

11:30

with a lot of businesses

11:31

who want to test the waters

11:32

first before committing. Yeah.

11:34

And we we model that out,

11:36

you know, 30 versus 49% or 49 versus 100.

11:39

You know, if you don’t want to give up control

11:41

now, but say perhaps in five years,

11:44

seven years,

11:45

you don’t you want to sell 100%.

11:48

We can model out

11:49

what those different looks.

11:50

Are like

11:51

and how much benefit

11:52

we are giving to the employees.

11:54

And then

Strong management teams are helpful — but not required

11:55

I teased on this a little bit earlier

11:57

with existing esops.

11:59

But number five here

12:00

for if you’re considering an Esop,

12:02

is that your management structure isn’t.

12:04

You know, having a good strong management

12:06

structure isn’t a prerequisite

12:08

for an Isa.

12:09

I would say to make an ideal

12:11

Esop candidate,

12:12

having a strong management team is,

12:14

a plus a bonus, but it’s not required.

12:18

And if you have a less formalized

12:19

management structure and Esop

12:21

could still be a good fit.

12:22

And it’s not like

12:24

we have a playbook that shows.

12:27

Here’s exactly what you do.

12:28

Here are the instructions for an Esop.

12:30

If you’ve seen one Esop,

12:32

you’ve only seen one Esop.

12:33

You haven’t seen them all.

12:34

They come in every shape and size.

Building long-term ESOP success through communication

12:37

Absolutely.

12:37

And that’s kind of

12:38

a surprising takeaway here.

12:40

But I think the

12:42

overall theme is

12:44

whatever the management structure is,

12:45

every business can be different

12:47

or company size and history,

12:49

you know, so on.

12:50

Make sure that you have clear

12:51

performance targets

12:53

and also commit

12:54

to regular communication

12:55

with employees before and after

12:58

the Esop transition.

12:59

And that’s going to strengthen

13:01

the overall outcome, solidify

13:03

the productivity gains

13:03

we’re talking about today

13:04

and make for an overall

13:06

successful Esop,

13:07

successful company and successful

13:09

employee ownership experience.

Closing thoughts and additional resources

13:11

So everyone, thanks for joining us today.

13:13

Hop on our website MENKE.COM.

13:14

We have a link to the study

13:16

available there.

13:17

Also reach us out to us

13:19

on LinkedIn Trevor Gilmore,

13:21

Ben Spadt,

13:21

you can find us also many pages as well.

13:24

We post a lot

13:25

about Esop companies,

13:27

everything from the capital

13:28

raise to transition

13:30

to the tax

13:30

benefits, to awesome

13:32

long term case studies as well.

13:34

Have a great day!

13:35

Join us for our next episode.