The Rise of Employee Stock Ownership Plans
At first, the reaction was more confusion than excitement.
In December, The RAM family of restaurants and breweries announced plans for an employee stock ownership plan, or ESOP, but few employees knew exactly what it meant. The more they learned, however, the more they liked the idea—and outsiders did, too. The 30-unit RAM Restaurants have seen an influx in applicants for open positions and president Jeff Iverson expects the ESOP will result in more loyalty and longevity of the company’s 2,000 eligible employees.
“As they learn more and hear more, they’re becoming more excited,” Iverson says. “Anytime someone has skin in the game, I think you can expect a different level of result. Will they stay around a lot longer? They should.”
Though details vary between companies, the basic premise of employee ownership remains constant: As a benefit, employees receive some level of stake in a company’s ownership, which many believe leads to better quality work, higher loyalty, and less turnover. That’s because even the lowest-tier workers have a vested interest in a company’s long-term profitability. Until now, many restaurants have shied away from employee ownership. But at a time when the restaurant industry is increasingly facing criticism over low wages and dead-end jobs, employee ownership is starting to catch on with some multi-unit full-service operators.
Since the announcement was made in late 2014, the day-to-day operations haven’t changed at The RAM’s restaurants and breweries, a Lakewood, Washington-based company that comprises three distinct restaurant brands across six states. The Iverson family still runs the business. Now, employees who work 1,000 hours a year are eligible for the long-term benefit of the ESOP, which grows along with the company’s profits.
“Basically, it is a retirement plan,” Iverson says. “Those shares accumulate in each individual’s account. It’s not a get-rich-quick scheme. But if people are committed to a company and stay with a company, there will be a nice pot of gold for them down the road.”
Understanding Employee Ownership
Employee ownership is most popular in manufacturing, professional services, and finance industries. According to the National Center for Employee Ownership (NCEO), a nonprofit clearinghouse on the topic, about 70,000 companies in the United States offer ESOPs, government-regulated plans in which employers—oftentimes for free—dole out shares to workers through an ESOP trust.
Aside from ESOPs, some businesses offer unregulated employee stock options or profit-sharing plans. But there are no strict rules surrounding the term “employee-owned,” says Loren Rodgers, executive director of the NCEO.
“It’s a really ambiguous term. And there’s no standard,” Rodgers says. “Anybody can call themselves employee-owned.”
Rodgers says companies with ESOPs, the most common form of employee ownership, often report better results: Research shows those companies see productivity bumps, they’re less likely to be acquired or go bankrupt, and because they’re more likely to offer 401(k) plans, employees of ESOP companies have more than twice the accumulated wealth of workers at non-ESOP companies.
Many assume that employee ownership changes a company’s governance, but Rodgers says companies generally continue to have traditional leadership with a board of directors and a CEO. Generally, employees would only have voting rights on big issues like selling off a company or mergers and liquidations.
With ESOPs, companies can shift over a small percentage of their ownership, such as 20 percent, or owners can use an ESOP as an exit strategy, transferring all ownership over to employees. Private companies often employ ESOPs, though some larger public companies like Publix Super Markets have offered such plans.
“The ESOP story is really the story of a small private company that makes everyone not solidly wealthy, but solidly middle class,” Rodgers says.
When an ESOP is Right
But such plans aren’t for every company. The smallest mom and pops would likely find the process and costs involved too onerous. And the largest corporations may struggle with fostering an ownership mentality among employees.
Bobby Fry, owner of Pittsburgh’s casual restaurant Bar Marco, says his company’s employee-ownership plan only worked because of the trust already in place between employees and management.
“There’s not really much of a divide between employees and ownership,” he says. “This is definitely not something that would work well for every restaurant. We’re lucky enough to have a team to build this up together.”
Offering company shares was among an array of strategies employed by Fry, a former Wall Street trader who left the business in 2010 to pursue the restaurant with his three childhood best friends. This spring, his restaurant ditched tips and instead committed to paying all employees a base salary of $35,000 along with providing health insurance and paid vacation. Now, those in the kitchen earn the same as front-of-house employees, regardless of sales. With constant hours and full-time schedules, Fry believes employees are more likely to give their all regardless of how busy the restaurant is.
“There’s no more incentive to work on a Saturday night than there is on a Tuesday night, which creates a consistent, higher level of service,” Fry says.
Bar Marco’s employee-ownership plan isn’t an ESOP. Rather, it’s a sort of short-term savings account, which employees can access once they accumulate enough shares. All together, Fry says, Bar Marco’s generous benefits are meant to provide more stability for employees, who in turn stick around longer and work harder.
“It’s more about quality of life,” Fry says. “We want you to know you have money to fall back on.”
Aside from the regular productivity and loyalty benefits that come with employee ownership, Bar Marco has realized other gains. The kitchen’s higher-skilled, more qualified workers save money on food costs by butchering whole animals in-house and canning seasonal vegetables for later use.
The founders of Zachary’s Chicago Pizza, on the other hand, used an ESOP as a means to sell the company. After several years of transferring ownership, the company became 100 percent employee-owned in 2011. CEO Kevin Suto, who has been with the four-unit California brand since 1984, says the company has a tradition of paying employees well above the industry standard, and the original owners wanted to maintain that culture.
“We’ve always prided ourselves in treating people well and rewarding employees for doing good work,” Suto says. “[The owners] just felt if they sold the company to someone else, the first thing they would do is start trimming payroll.”
Employees receive company shares based on their pay and longevity, so the longer they stay, the more they earn. Suto says some workers’ accounts now top $100,000.
“To me the most rewarding part of the ESOP is seeing that people I’ve been working with for 25 or 30 years have something of a nest egg as they start to get older,” he says. “They would not have had that otherwise. There’s no way.”
Zachary’s proudly advertises its employee-owned status, which Suto sees as a win-win with customers and employees alike. But Suto admits the long-term rewards of employee ownership can sometimes get lost in the day-to-day.
“It really depends on the person. They do appreciate it. It certainly doesn’t hurt,” he says. “But I don’t think it’s on the minds of everybody every day. It’s something that we sometimes have to remind each other of.”