Beyster Interns Learn to Form the Loop Between
Compensation and Stock Price
By Ryan Jacobs
My classmates at the Rady School of Management and I used to give our accounting professor a fair amount of grief over the frequency with which he would illustrate principles using his own real-life vignettes. After spending this summer working at the Beyster Institute, however, I now feel some solidarity with my old teacher. My work at Beyster has impressed upon me that there is a story encoded in every financial statement. Working in financial services involves teasing out that story and ideally continuing to write it. This is especially true at Beyster, where it seems like every one of our clients has taken their own unique path to employee ownership.
We have a little intern “bullpen” here on the second floor of the Cave Street building. I’m flanked by Lili Yang, with whom I worked in a study group during my first quarter, and Ben Durwood who is currently pursuing a CPA along with his MBA. Durwood recently updated the questionnaire that we send out to all our new clients. The questionnaire asks for basic information about corporate structure and employee compensation, but it also includes some prompts designed to uncover the true reasons for pursuing an employee stock ownership plan. Of all the clients I’ve worked for this summer, exactly zero has listed “tax benefits” as their primary motivation. There’s always something personal – someone wants to retire and leave the company to the employees that built it, someone wants to reward the workers who helped her succeed, someone values his employees and wants to give them an incentive to stick around. These personal factors play a critical role in how we approach each ESOP transaction, and they often help us and our clients choose between a variety of scenarios we present.
As interns, Yang and I were fortunate to be able to audit this summer’s Beyster Fellowship Symposium hosted by the Foundation for Enterprise Development. Joe Hsueh, a Ph.D. candidate at MIT Sloan, gave a memorable presentation during which he demonstrated a forecasting model he had designed in an attempt to quantify some of the more intangible factors in ESOP transactions. Then he showed a web that incorporated all the drivers behind the model. The crucial takeaway was that tying stock price to compensation creates a desirable feedback loop when correctly implemented. In every company, financial compensation for employees leads to increased job satisfaction, which in turn leads to a higher stock price; in ESOP companies, that higher stock price results in greater financial compensation for employees. This cycle created by the ESOP has certain intuitiveness to it, but sometimes the methodology of valuation has trouble accounting for the middle role played by job satisfaction within this cycle.
At the Beyster Institute, the personal components of the ESOP – job satisfaction, reward and recognition, and sense of responsibility – are at the heart of the work we do on behalf of each one of our clients. At the end of my internship, I will have developed my financial modeling skill set, but I will have gained more than that: I will understand ESOPs not through textbooks, but through stories.