When I first joined an ESOP company ten years ago, it was my first foray in the employee ownership space. I haven’t turned back since, but becoming involved in this world wasn’t without a steep learning curve. Employee-owned companies tend to have more involved, collaborative, and participatory cultures than traditional companies, which can be an adjustment for a new hire (and even more so for those in any kind of leadership position). Not only are you trying to learn your job, but there is also this added element of ownership culture to grasp. Being a leader in an ESOP company is an article for another day. Here, my focus is on employee-owners and what they need to know.
For a new employee-owner, the concept of employee ownership and the mechanics of an ESOP can be overwhelming. What does “ESOP” even mean? What does it cost to participate? I’ve never been an owner before—what does that mean now? Does it mean I have more control? These are all common questions that can run through employees’ minds when trying to learn the basics. When I began as an employee-owner, the ESOP was mentioned in many places—onboarding materials, the employee handbook, the company intranet, and training classes. I could tell the company was proud of being employee-owned and that I had joined a special place; yet, I still had miles to go to truly understand the ESOP and what it meant for me. Over time, I started to put the pieces together and build my understanding, though having one go-to resource with all the basic information would have been immensely helpful.
ESOP companies tend to spend considerable time and effort on education, communication, and resource creation, all with the hope of increasing their employee-owners’ understanding of not only the ESOP but also the ins and outs of how a business operates. Trying to discern what should be included and when is another important consideration. And while many companies are doing a tremendous job and have developed fantastic resources, other companies are still trying to find the right balance between what information should be shared and how to simplify a complex topic in a way that is easily understood by employee-owners at all levels.
The NCEO has just launched a customizable resource called ESOPs for Employee-Owners to address this educational opportunity. This booklet, available in both English and Spanish, has been created to give your new employee-owners an in-depth guide to what an ESOP is and what it means for them. One caveat is that this booklet is exclusively for educational purposes. Only the official plan documents outline the rules of the plan, and these should be communicated with your employee-owners.
Starting with the basics, the booklet defines what an ESOP is and the high-level idea behind them. Since a 401(k) is a retirement plan that is more widely understood, it can be helpful to explain an ESOP in similar terms while highlighting the key differences between the plans.
From here, the resource examines ESOP eligibility. How does someone get into the plan at your company? How many hours do they need to work each year, and how long do they need to be employed before they enter the plan?
Once an employee-owner enters into the ESOP, the next piece to understand is contributions and allocation. If your company has a leveraged ESOP, there is an opportunity here to talk about how the loan is repaid and how that impacts the contributions, with helpful illustrations of how the value grows as the loan is paid down.
Earning what is in the account through vesting is the next topic covered. A common structure for
vesting is the six-year graded vesting schedule, which is explained in the booklet. However, users can customize this section if operating with a three-year cliff vesting schedule, for example. After vesting, what happens when someone leaves the company? How and when is that money paid out? Share value is another key factor in determining how much the accounts are worth, and the basics of valuation are discussed next.
The booklet’s final sections briefly address the issues of diversification, taxes, voting, governance, and other commonly asked questions. The ending highlights the importance of everyone’s role in the success of the company (and the success of the ESOP and employee-owners by association).
This booklet covers a wide range of topics while allowing the opportunity to tailor specific portions to your ESOP plan. Once you have added in all your relevant company information, these booklets can be given out both to new employee-owners as part of their onboarding and to more tenured employee-owners as a refresher. There are also synergies between the topics in this booklet and The Download, the NCEO’s monthly, solution-focused resource. Several documents featured in The Download complement the resources in this booklet, including the ESOP eligibility worksheet, which can be tailored to each employee’s hire date to determine when they should expect to enter into the ESOP.