Humans have a natural desire for autonomy and independence. When management’s style consists of only telling employees what to do, this can lead to lower self-esteem, resentment, and anxiety in employees.
ESOPs (Employee Stock Ownership Plans) can lead to a better management style that can positively impact both employees and profit. ESOP managers often use a more employee-centric style.
With an ESOP in place, employees become co-owners of the company, and their success is tied to the company’s performance. This shared ownership instills a sense of purpose and commitment among employees, as their efforts directly contribute to their financial well-being.
Management in an ESOP company often seeks input and feedback from employee-owners before making significant decisions. There is a greater emphasis on empowering employees to take ownership of their work and make decisions that impact their departments or roles. This empowerment enhances job satisfaction and company loyalty.
ESOP managers often share financial and operational information with employees to keep them informed about the company’s performance. This transparency builds trust and encourages open dialogue between management and the workforce.
ESOP companies often invest in employee development and training. By empowering employees with the knowledge and skills they need to excel in their roles, management fosters a culture of continuous learning and improvement.
By aligning employees’ interests with those of the company and promoting shared ownership and decision-making, an ESOP can create a positive work environment where employees feel valued, empowered, and motivated to contribute to the company’s success. This results in higher productivity and more profit for both the company and the employees.
Join Gregory Caruso at The ESOP Association Multistate Regional Conference 2023 in September as he presents “Your ESOP Valuation: More Than Just a Number” with co-presenter Sarah von Helfenstein. Certainly, the value found is the key of any business valuation, but valuations also contain so much other information that is useful to management and trustees. Learn from an experienced former small business owner and ESOP valuator what attributes should be compared and analyzed to use your business valuation not just for the number, but as a management tool. In this session, we will dive deep into the intricacies of ESOP valuation, moving beyond the surface-level numbers to uncover the key elements that provide a valuation appraiser and more importantly, management and trustees insight into a company’s value. This is an important topic for all ESOP trustees, plan administrators and employee-owners. It can become a management tool for trustees and management and allow employee stock owners to participate more fully in the success of their company. Internal and third-party Trustees will learn what to look for and how to better assess a value conclusion provided by a valuation appraiser.
Key Performance Indicators (KPIs) can be an effective tool for measuring and monitoring the success of an Employee Stock Ownership Plan (ESOP). Here are some steps to effectively use KPIs in an ESOP:
Identify relevant KPIs: Identify the specific KPIs that are most relevant to the ESOP’s goals and objectives. These may include financial metrics such as revenue, profit margin, and return on investment, as well as non-financial metrics such as employee engagement, customer satisfaction, and employee retention.
Set benchmarks: Set benchmarks or targets for each KPI based on past performance, industry standards, or other relevant factors. These benchmarks should be realistic and achievable, but also challenging enough to encourage continuous improvement.
Track and measure KPIs: Establish a system for tracking and measuring KPIs on a regular basis, such as monthly or quarterly. This may involve using software tools or spreadsheets to collect and analyze data.
Monitor progress: Use the KPI data to monitor progress toward achieving the established benchmarks or targets. This can help identify areas of strength and areas for improvement, and enable the ESOP to make informed decisions about how to allocate resources and make improvements.
Use KPIs for performance evaluations: Consider incorporating KPIs into performance evaluations for ESOP participants. This can help to align individual performance with the ESOP’s overall goals and objectives, and provide employees with a clear understanding of how their contributions impact the success of the ESOP.
Adjust strategies as needed: Use the KPI data to make informed decisions about adjusting strategies and tactics to better achieve the ESOP’s goals and objectives. This may involve shifting resources, changing business processes, or adopting new technologies or practices.
Overall, using KPIs in an ESOP can help to align business activities with the ESOP’s goals and objectives, measure progress, and make informed decisions about resource allocation and strategy.
Key Takeaway 1: The DOL is committed to ensuring that ESOP valuations are conducted properly. This is good news for ESOP trustees who are responsible for ensuring that valuations are accurate and in compliance with DOL regulations. It’s important for trustees to stay up to date with any new guidelines that are issued so that they can continue to fulfill their fiduciary responsibilities and ensure that plan participants are receiving accurate valuations of their ESOP holdings.
Key Takeaway 2: New guidelines could provide more clarity and consistency in ESOP valuations. One potential benefit of new ESOP valuation guidelines is that they could provide more clarity and consistency in how valuations are conducted. This could make it easier for ESOP trustees to select qualified, independent appraisers and ensure that valuations are conducted in compliance with DOL regulations. More clarity and consistency could also make it easier for plan participants to understand the value of their ESOP holdings and make informed decisions about their retirement planning.
Key Takeaway 3: ESOP trustees must continue to be vigilant in ensuring compliance with DOL regulations. While new ESOP valuation guidelines could provide more clarity and consistency, it’s important for ESOP trustees to remember that they are ultimately responsible for ensuring compliance with DOL regulations. Trustees must continue to be vigilant in selecting qualified, independent appraisers, ensuring that valuations are conducted properly, and fulfilling their fiduciary responsibilities to plan participants. Any new guidelines issued by the DOL should be seen as a tool to help trustees fulfill these responsibilities, rather than a replacement for their ongoing diligence and oversight.
Additional thoughts: New DOL regulations could potentially benefit ESOP owners if they were designed to provide more clarity and guidance around certain aspects of ESOPs. For example, the DOL could provide more guidance on the selection and responsibilities of independent appraisers, which could help ensure that ESOP valuations are more accurate and consistent.
The DOL could also provide more guidance on how ESOP trustees can fulfill their fiduciary responsibilities, which could help prevent conflicts of interest and ensure that plan participants are receiving the best possible management of their ESOP.
Another area where additional DOL regulations could be beneficial is in providing more flexibility for ESOPs. ESOPs can be a powerful tool for business owners looking to transition ownership of their companies to their employees, but the current regulations can be complex and restrictive. Additional regulations that allow for more flexibility in how ESOPs are structured and managed could make them more attractive to business owners and potentially lead to more widespread adoption of this retirement plan option.
It’s important to note, however, that any new regulations should be carefully considered and designed to balance the needs of plan participants with the needs of business owners and the broader economy.
As a trustee of an ESOP company, it is important to understand the primary drivers of value. We call them People, Processes, Profits. While simple, if you always keep these factors in mind, it will help you make informed decisions on correctly pricing annual shares. Some details about these simple factors that can help you determine how your ESOP company should be priced include:
People – basically the business and the people that run it. Does the sum of the parts create resiliency or is the ESOP-owned company brittle? Here are a few more items to consider when valuing your people.
Business Model: Look at the company’s business model to determine whether it is focused on producing a few products or services or has a more complex business model with multiple products, services, and business lines.
Market Position: Evaluate the company’s market position to determine whether it is a market leader or a follower. Is your company a market leader in a specific niche? Is your company focused on disrupting existing markets or creating new ones?
Management: Assess the company’s management team to see if it has a track record of successfully managing a simple or complex business model. Winners tend to solve problems and win. Other companies never quite reach their potential.
Staff: Many businesses rely on highly trained technical staff. Whether they are licensed mechanics, highly trained programmers, or professional personnel, having a well-trained cohesive team to implement processes is essential.
Processes
Does the Company have well defined processes and procedures for all necessary components of the business? This applies from initial lead generation right though final invoice collection and after-the-sale (or perhaps making the next sale) customer care.
Does the Company have the Processes in place to prepare projections and goals? (This is like playing chess and thinking 3 or 5 moves ahead.)
Do they have regular management meetings and regular staff meetings where goals are reviewed, bottlenecks are resolved, and people are listened to?
“A company has excellent processes when Average People get extraordinary results Every Time.”
Profits
Does the Company consistently make money, or are there frequently reasons why goals were not met?
Are gross profits (including reasonable allocations of soft costs) estimated on jobs, product lines, services? Can more of those goods or services be sold?
In summary, as a trustee of an ESOP company, it is important to understand the company’s People which encompasses the business model, market position, and management; it’s Processes including goal setting and review; and Profits to determine its share value. A highly resilient, consistently profitable business has high value. This can help you make informed decisions that are in the best interest of the plan participants and beneficiaries.
The Art of Business Valuation is pleased to be sponsoring the NCEO 2023 Annual Conference. NCEO is a leading ESOP Association that promotes, educates, and protects ESOP Companies and their employee-owners. Join me and 2,000 employee-owners who are passionate about doing business in a way that offers social wealth and equality for the many! See you at the NCEO 2023 Annual Conference at the Kansas City Convention Center April 25-27. https://www.nceo.org/
Greg Caruso is an expert ESOP business valuator. Let him know if you plan on being at the NCEO Employee Ownership Conference. .
