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Guests: Adam and Jason Svet. Adam is the CEO and his brother Jason is the President of Technology and Management at their company, Eastridge Workforce Solutions. Eastridge is a global workforce solution provider that focuses on recruiting and managing the supply chain of recruiting.
Episode in a Tweet: Establishing an Employee Stock Ownership Plan could inspire your employees to own what they do.
Quick Background: A good CEO is always looking for ways to inspire his team and encourage employees to take ownership of their work.
One way to do that? Let your employees earn some real ownership.
Top young talents want to feel like they’re a real part of the companies they work for. More and more CEOs are setting up Employee Stock Ownership Plans (ESOPs) to provide that incentive, that motivation, and that feeling of being a part of something BIGGER than profit.
On today’s show, Adam and Jason Svet discuss the business and culture fit issues that CEOs who are interested in an ESOP should consider. They also talk about the nuts and bolts process of setting up an ESOP and how going through the process helped them to put their company’s values in action and get their employees thinking and working BIG.
Transcript: Download the full transcript here.
Key Insights on Creating an ESOP to Fit Your Business
1. Defining your ESOP.
Adam says that an ESOP is “an ERISA-regulated benefit plan, not dissimilar from a 401K as an example. It is a mechanism through which employees, by way of a trust, are able to accrue ownership in the shares of the employer in a way that is tax advantaged – similar, again, to a 401K.”
Adam Svet: An ESOP is a benefit that comes at no cost to the employee, and it’s one that rewards long-term tenure because every year that you’re here and eligible, you are accruing more shares.
Within those parameters, there’s quite a bit of room to customize an ESOP to fit your business. Commonly, companies will fund their ESOP through debt financing from a third-party lender, but you could also use profits or a surplus of cash on the balance sheet. The ESOP then uses the cash to buy a fixed number of your shares. Employees then earn those shares as part of your benefit package.
“It’s a benefit that comes at no cost to the employee,” Adam explains, “and it’s one that rewards long-term tenure because every year that you’re here and eligible, you are accruing more shares.”
Establishing an ESOP also requires you to select a trustee who will act as the shareholder representative for your employees. The trustee is a fiduciary, always required by law to act in the best interest of your employees. One of the trustee’s most important tasks is assigning a third party to appraise your company every year and set a fair valuation for your shares. Other ESOP tasks are left to a board of directors elected by shareholders.
2. Does your business fit the model?
The effort that goes into setting up an ESOP is one reason that more companies aren’t implementing these plans. A major overhaul to your corporate structure is going to take careful planning, a major time commitment at the C-suite level, and, in all likelihood, outside legal consultation. The process typically takes around six months, but for larger, more complex business, you might be looking at a year or two.
You also have to consider if an ESOP is right for your business. It might be a good idea to break out your crystal ball. Where do you want to be in 5 years? Ten years? Where on that trajectory is your company sitting right now? Is this change going to spread your resources too thin? Or do you have a solid enough footing that an ESOP might inspire employees to push your company up a level?
“A high-growth, earlier-stage company, I’m not sure that is a good financial fit,” cautions Adam. “More mature businesses that have consistent cash flow as well as a consistent balance sheet, that profile really lends itself to the ESOP model, particularly if you’re going to be leveraging your balance sheet and your valuation of your business is predicated on free cash flow. You just want those things to be consistent and healthy.”
3. What about your culture?
Culture fit may be even more critical. If you’re a CEO who’s grown your business from your basement to the corner office, you don’t want to be giving part of your shares to workers who aren’t committed to your vision, who just clock in and clock out, who started off as C players and haven’t tried to grow into Bs or As.
From the other perspective, workers aren’t going to be motivated to earn shares in a company they don’t love working for, a company that doesn’t encourage their creativity and growth, a company that doesn’t make them feel like they’re working for something more than money.
“There are businesses that just lend themselves to a ‘workplace of we,’” Adam says. “Businesses that are massively predicated on the culture that is present throughout the organization where team and alignment of vision are just more important than others. Our company is one of them. Our secret sauce is our people. That’s our number one differentiator. We have the people that do a phenomenal job day in and day out. The notion of having a ‘workplace of we’ automatically resonated, not only with my brother and I, but when we announced it to the broader company, it clicked immediately.”
Jason Svet: The people of Eastridge have an expectation that has been developed over decades on what our culture represents, about what the Svet family represents, about what our father represented to them.
The effect on Eastridge’s workforce was immediate too. As soon as the Svets announced the ESOP, they noticed their employees started thinking and acting like owners. “When they came back on Monday, people were already renegotiating with vendors and refusing to accept price increases,” Jason remembers. “We had ideas streaming in from the company about different ways that we could approach the business. We had a dramatic increase in employee engagement and also in what our employee net promoter score was.”
4. Structuring your company around your values.
The train of thought and planning that led Adam and Jason to an ESOP started with an incredibly challenging set of circumstances. Their father, who had founded Eastridge in 1972, passed away in 2017 after a battle with ALS. Because Eastridge was such an outstanding company and in such solid financial shape, third parties swooped in with buy offers. Adam, Jason, and their mother were the only shareholders in the company, and they had to plot a way forward that would honor their father’s legacy while positioning the company for its next chapter.
Jason remembers asking, “Assuming that we were to go with the private equity route or some type of third-party route, the day after, when we looked our team members in the face and told them what we did, how would we feel? When we asked that question of ourselves, we felt a little sick inside. The people of Eastridge have an expectation that has been developed over decades on what our culture represents, about what the Svet family represents, about what our father represented to them. He was a mentor, a father figure, a leader to literally hundreds of people in the company. And to all of a sudden have lost dad and then lost the culture to a third-party with no right and no say in it after decades of investment of their time and their lives, we just felt that we would be frauds.”
Now there’s certainly nothing wrong with being on either end of a merger or acquisition. Different CEOs have different goals. If you want to grow, sell, and move on to the next thing, that’s your prerogative.
But the way the Svets handled such a critical moment in their company’s history raises some important questions all business owners should ask themselves.
How much do you value your company? What does working for you offer top talent that they can’t get from your competition? What do you want your legacy to be to your company? To the people who work for you and their families? To your family? To yourself?
Ultimately, the answers to those questions are what’s going to determine who wants to work for you, how you want to compensate those people, and what all of you can accomplish together on your way to BIG.
Top Takeaways
1. Commit your resources. Setting up an ESOP takes time, planning, and cash. Budget for months, not weeks.
2. Create the right benefit for the right reasons. An ESOP should enhance the culture and workforce you’re already cultivating.
3. Follow your values. Whom you hire and how you compensate them speaks volumes about who you are as a CEO and what kind of company you’re running.
Transcript: Download the full transcript here.
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