What Does an ESOP Have in Common with My New Kitten?
We recently got a new kitten. Her name is T.C. (The Cat) and she is three months old. I may be biased, but she is pretty cute; she is also all kitten. It is like having a baby all over again (my kids are in high school and college, so it has been more than a couple of years since I have had to deal with this.)
This isn’t our first cat (my wife has continuously had a black cat since she was ten years old.) However, over time we forgot everything that we had to do to train a new pet. Fortunately for us, T.C. is a quick learner.
The Vicious Circle
Many business owners find themselves feeling like this on a regular basis. Due to employee turnover, they find themselves in a perpetual training regime. This can represent a substantial expense to the organization for several reasons. To name just a few:
- Direct costs of training replacement staff
- Lower productivity
- Lost sales
- Strained customer relationships
- Reduced employee morale
Break the Cycle
Companies deploy considerable resources to reduce the amount of voluntary turnover. One of the tools available to assist with reducing turnover is an Employee Stock Ownership Plan (ESOP).
An ESOP is a qualified defined contribution retirement plan that is invested primarily in the stock of the sponsoring employer. Investing in the company stock is unique for retirement plans and has multiple potential benefits for the participant. There are three benefits that I would like to discuss briefly that all have a role in helping to reduce voluntary turnover.
(1) ESOPs are typically an additional retirement plan (most often with a 401(k) plan). As a result ESOP participants generally have larger retirement plan contributions than other participants. ESOP participants have 2.7 times the non ESOP retirement plan contribution rate1. Higher retirement plan contributions are valued by employees and encourage them to remain with their current employer.
(2) On average, ESOP participants are actively engaged and more productive. A recent study found that 73 percent of companies reported that the plan positively impacted employee productivity2. Engaged employees feel valued and are more loyal to their employer.
(3) ESOPs can allow an employee to enjoy the return on their sweat equity. The average ESOP account balance is $195,0003. Employees are encouraged to stay for the upside potential in the value of their account.
Don’t believe me?
The proof is in the results. A 2012 study found that ESOPs were associated with lower employee turnover and higher returns on equity (ROE)4.
I’m planning on having T.C. around for a long time. If you want your employees to do the same, you might want to take a deeper look at employee stock ownership plans to see if they are right for your organization.
In addition to blogging here, I also tweet regularly about topics of interest to ESOPs. Click to follow me on Twitter- @jlripperger .
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1The Total View 2011, Principal Financial Group Report on Retirement Plan Trends among approximately 37,000 retirement plans and 3.7 million eligible participants
2Employee Ownership Foundation’s 20th Annual Economic Performance Survey of ESOPs, May 2011 *Based on independent valuation
32010 Company Survey conducted among ESOP Association members
4Does Linking Worker Pay to Firm Performance Help the Best Firms Do Better?,National Bureau of Economic Research, 2012
No investment strategy, such as asset allocation or diversification, can guarantee a profit or protect against loss in periods of declining values. Company stock is not a pooled investment. Stock may experience greater volatility and should not be directly compared to investment options that have a more diversified investment mix. It is not intended to serve as a complete investment program by itself. Insurance products and plan administrative services are provided by Principal Life Insurance Company a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392t130205020i
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