With the COVID-19 pandemic casting a cloud of uncertainty and instability over the economy, leading to record numbers of unemployment claims, you may have heard people (including us) saying that ESOP companies are more resilient in the face of adversity.
It’s true. Studies have repeatedly shown that ESOP companies:
- Had 50% fewer layoffs than traditionally owned companies during the last two recessions
- Are six times less likely to lay off employees overall
- Are 50% less likely to go out of business over a 10-year period
ESOP companies’ resilience during crises is not something that happens by accident, or that happens automatically, or even easily. Rather, ESOP-owned companies survive difficult times because they have the ability to make hard decisions that traditionally owned companies can’t, and the spirit to make those decisions and succeed.
We spoke with some of our clients who endured the Great Recession in 2008 about the strategies they used and the ways in which their ESOPs empowered their businesses to weather the storm and come out thriving on the other side.
Give employees the decision-making power
One ESOP-owned business we spoke to told us that they were facing a budget shortfall in 2008. Facing the prospect of significant layoffs, they put the choice in the hands of the employees: either 10% of the staff could be laid off, or everyone could accept a 10% pay cut across the board.
Although the prospect of a pay cut is never a welcome one, especially during a recession, the employees decided that protecting the livelihoods of their fellow employee-owners was more important. They agreed to take the pay cut. As a result, no one lost their job and the company was well-positioned to increase their market share when the economy began to recover because they already had an experienced team in place, rather than having to first spend time and resources on hiring new staff.
This is a prime example of how an employee-focused mentality can benefit a business in difficult times. A traditionally owned company would have unilaterally opted to cut costs by eliminating jobs, leaving itself scrambling to make up for lost ground when the economy improved. ESOP companies have an employee-centric approach built into their DNA. They know that when businesses approach hard decisions with transparency and inclusivity, everyone benefits.
Show your employees how much you value them
Another client we spoke to had seen their business’s after-tax income go from $2 million a year to just $250,000 in 2008. They had already gone through one round of layoffs. In better times,
the company had been making discretionary profit-sharing contributions to their ESOP,, but with revenue down so far, no one at the company would have logically expected the board of directors to make a contribution that year. But that’s exactly what they did. The board decided to make a discretionary contribution of the full $250,000—every bit of that year’s profits—as a way of thanking their employees for sticking with them through hard times.
Many of the business owners we work with cite “wanting to reward their employees” as one of their top reasons for wanting to establish an ESOP. In turbulent times like these, your employees need to feel valued more than ever. The board in this example made it crystal clear that they know exactly how much of their ability to survive the Great Recession was because of their employees, and they showed their gratitude to the fullest extent they possibly could.
When times are tough and profits are down, a discretionary contribution to your company’s ESOP may be the last thing on your mind. But when the economy is suffering and your business is hurting, it is only natural for employees—no matter how committed they are—to start considering their options. Making a real, tangible demonstration of your company’s gratitude to its employees can be the boost they need to keep their focus and morale up through extraordinary challenges.
Contact your Menke ESOP advisor today to discuss these, and other strategies you may be able to use to help your business and your employees in this difficult time.
Menke & Associates, Inc. has helped over 3,500 companies successfully transition to employee ownership. Our holistic ESOP approach enables a positive outcome for the company, its employees and its shareholders. We believe ownership is powerful.
