The Business Transition Blog

ESOPs: Not A Fable

I met recently with one of Canada’s leading authorities on ESOPS, (Employee Share Ownership Plans) Perry Phillips, who has written two books on the subject. He has some very interesting statistics about how ESOPs are helping business owners and companies to change and thrive, even in difficult markets. Quoting a study done by the Toronto Stock Exchange comparing ESOP and non-ESOP public companies, he stated that ESOP companies had:

  • 123% higher five-year profit growth
  • 95 % higher net profit margin
  • 24% greater productivity
  • A 2 to 10 per cent premium on the stock market
  • 92.26% return on average total equity
  • 65.52% higher return on capital
  • 31.54% lower debt/equity ratio.[1]

Why do ESOPs work? According to Phillips, they help address many of the workplace issues that plague employers today: productivity, competitiveness, survival, succession, recruiting and retention.

When employees have real ownership of the company they work for, they are more inclined to make it more productive and profitable. While employees will rarely have as much drive and passion as the founder, they will narrow the gap and cut expenses, reduce waste, and encourage co-workers to be more productive and efficient. They will be more inclined to speak out when they see someone goofing off or stealing from the company. They will take a more active interest in the fiscal health and well-being of the business. They will look for others who would make a positive addition to the organization, so recruitment challenges and costs are reduced. They won’t leave over petty differences or a small gap in pay.

“But,” says Phillips, “the mere fact of setting up an ESOP does not automatically transform a corporate culture. It takes more than a shareholder’s agreement; employers and employees must embrace the special dynamics of share ownership and commitment.” [2]

A successful transition to an ESOP doesn’t happen by chance. It requires a thoughtful, planned approach. It requires commitment and participation from the owner and employees. Philosophy and values must be aligned in a culture of transparency and trust. Phillips goes on to say, “The goal of most ESOPs is to have each employee reach his or her maximum potential as a person and as an employee.”[3] He suggests that all employees get training to be the best that they can be in their area of responsibility.

From our perspective, that reinforces and aligns with the holistic and positive approach we take to work with our clients. A company that taps into the strengths and abilities of their employees; encourages full ownership and participation; has a leader who is willing to be transparent and share control;  and, develops and trains people to become as good as they can be, is “growing their business intelligently.” A carefully planned and executed ESOP, combined with a strategic people development program could help you transition your business and leave a strong legacy.

You can reach Perry at:

[1] Perry Phillips, Employee Share Ownership Plans, (John Wiley & Sons, 2001) p. 11

[2] Ibid p. 8

[3] Ibid p. 135