ESOPs Turn Employees into Owners

The most common route for employee ownership is for the ESOP, as a trust, to purchase a company from a private owner. This might be a family that expected to pass along the company as an inheritance. “If it’s a family-owned business, and now your kids really don’t want to do that,” Higgins says, “how do they exit without seeing their legacy go away?”

That’s the case ARG made to its founders, Don and Drennon Adams, starting in 2004. “Took about two years to convince them that we could do this and that it was a good move and that their legacy would stay going,” Higgins says.

The Adams were already living in Washington and running a new rubber company (which ARG subsequently acquired), so Higgins says they didn’t have a sentimental tie to the shop. And because the business had been operating in the absence of its owners, Higgins says the transition to the ESOP was seamless.

Alaskan Brewing Company in Juneau likewise abided by the ESOP ethos before forming one, says corporate administrator Joy Will. The ESOP, established in 2012, reaffirmed the direction that co-founders Geoff and Marcy Larson always had. “They have always included the employees in everything that’s been going on,” Will says. “They’ve always asked for feedback. They’ve always been very open about financials and expansions and new products. That’s what an ESOP is all about, is including your employees.”

Alaskan Brewing’s ESOP owns only 10 percent of the company; the other 90 percent is held by nearly ninety investors who helped launch the state’s biggest beer brand. Will says the Larsons wanted to test the waters and see how employees liked the plan. For Alaskan Brewing to become 100-percent employee owned, the ESOP would have to buy out the original shareholders.

That development, if it ever happens, would streamline Will’s job. She handles human resources and shareholder relations, which for an ESOP are the same thing.

Incentive Package

Despite the enthusiasm of converts, ESOPs are hardly growing in popularity. In fact, the number nationwide decreased over the last decade. Taken simply as a form of retirement planning, they face competition from programs that invest in broader portfolios. With an ESOP, members are stuck with one company (as long as they are employed there), and they can’t contribute more savings if they wish.

Some companies reserve employee ownership as a perk, where becoming a partner is a reward for loyalty and performance, or where stock is part of a compensation package.

An ESOP would seem to be a bad bet if each new employee dilutes the share value. Hamilton says that’s a common criticism, but it misses an important factor: a larger workforce grows the balance sheet, too, so the stock becomes more valuable.

Each ESOP has its own policies for who qualifies for membership and benefits. Vesting at JD Steel, for example, used to take five years, but the policy recently changed to allow for a prorated payout after three or four years of service.

The vesting window is six years at Alaska Garden & Pet Supply, the parent company of the Alaska Mill & Feed store in Anchorage (Higgins sits on its board of directors). Its ESOP formed in 2016, so this year saw the first batch of 100 percent vested owners among its eighty or so employees.

At both Alaska Garden & Pet and JD Steel, workers must clock at least 1,000 hours in a year to qualify for the ESOP, which is about half of a full-time job. This suits seasonal work like construction, Hamilton says, and the same goes for gardening supplies.

But don’t ESOPs have an incentive to limit their membership, either by capping individual hours or discouraging longevity past one year?

“That’s actually something that’s really heavily guarded by the Department of Labor and IRS and what our trustee looks for every year,” says Kimberly McCourtney, senior vice president of Alaska Garden & Pet. “We go through testing to make sure our turnover rate within the ESOP is not high, so you don’t have that inequity of ownership.”

ESOPS are covered by some of the same laws and regulations as 401(k) plans. One major difference, though, is that individuals do not contribute to their retirement out of each paycheck. Rather, ESOP trustees forward-fund retirement out of the company’s profits, and the trust buys back shares when employees leave.

JD Steel is somewhat unusual in having ESOP members also enrolled in a defined-benefit pension. About thirty ironworkers in the company’s Iron Inc. subsidiary are members of Iron Workers Local 751, and the union takes care of their retirement. Hamilton says the ESOP decided to offer a secondary retirement plan, partly as an enticement for tradesmen to stick with JD Steel projects for more hours in a year.

Given the underfunding problems with defined-benefit pensions, ESOPs provide an alternative that’s as secure as the businesses they own.

“Pensions are a thing of the past, almost,” says Will. “With an ESOP, the company contributes 100 percent of the money into the plan. What we as employees do, our hard work can impact the success of the company, and that’s our part in making our retirement plans grow. We don’t have to put in the money, but our hard work and our dedication, that’s what contributes to the growth of the company.”

A Richer Life

Employee ownership has made a difference, both material and intangible. Hamilton points to impressive growth in JD Steel’s valuation, enough to over-fund the retirement formula for several years. Beyond that, though, he says the ESOP changes how workers see themselves.

“Business owners operate and behave differently than quote-unquote the everyday employee,” he says. JD Steel holds regular leadership meetings, even for teenaged novice ironworkers. Hamilton says he advises youngsters to “put their business owner hat on,” which focuses their attention on long-term decisions.

The ESOP at Alaskan Brewing, despite owning a minority stake, still gives members a sense of involvement. “What we tell our employees when they enter the plan is that they’re ambassadors of our company and brand,” says Will. “We talk to them about being respectful team members, to speak up to share their ideas if they see something that can make our processes more efficient.”

Alaska Garden & Pet likewise sees greater input from workers. “Everything from design to how it looks on a shelf—everything that every employee does has an impact, so we hope that that’s the greatest long-term net result of the ESOP,” McCourtney says. “People look at it with an ownership mindset and pride [so] that we can carry on that history and pride of ownership that the family has left in our trust.”

The company that became the Alaska Mill & Feed store started in 1950 with chemical engineer Don Donatello selling bleach, wax, and other cleaning products. Donatello expanded into making soap, which required rendered animal fat, and the byproduct was sold locally as livestock feed. By 2016 the Donatello family was ready to sell the operation to the ESOP.

Brooke Shortridge, marketing director for Alaska Garden & Pet, noticed a culture shift from being a family-owned to an employee-owned company. “Coming into work, you’re like, ‘Everything I do on a day-to-day basis has a direct impact on the success of the company.’ The more successful you are, the more money you’re gonna have in your retirement,” she says.

Employee ownership is a selling point during hiring, and new hires at Alaska Garden & Pet are assigned a mentor to engage them with the ESOP. McCourtney and Shortridge acknowledge that Ship Creek is a lousy location for a retail store, but Alaska Mill & Feed’s clientele make a special trip to the industrial section of Anchorage for the extra value of customer service and product knowledge. That makes the human side of the operation, with experienced and attentive workers, that much more important.

“When we hit COVID and other businesses were struggling, our employees were engaged,” McCourtney says. She notes that it was an employee’s idea to begin home delivery with a new van. The store also created a call center to service the e-commerce division. Another idea was to create garden kits, which became popular for kids taking virtual classes from home.

An engaged workforce has spared JD Steel from hiring headaches, according to Hamilton. He believes the ESOP insulated the company from the recent drop in labor participation, which he attributes to people who felt their employer didn’t have their back “when things got scary” during the pandemic. “A lot of it had to do with ‘I’m spending too much time away from my home and my family, making somebody pathetically wealthy,’” he says.

With an ESOP, workers not only know exactly where the value and profit of their company goes, they have a say in where to put it. Instead of buying a black jet, to use Hamilton’s example, a well-run ESOP provides every member long-term comfort and a short-term sense of involvement in the enterprise.

That’s a trade Hamilton is willing to make. “I live an extremely modest life as the president of multiple-thousand-people companies and multiple companies. I don’t live a great, gigantic, personally enriched life—if you measure that by somebody of a similar business,” he says, “but from the personal side, I can do a testimony that I’m living a much richer life.”