Stock Ownership Plans Boost Staff Productivity

San Diego Business Journal

FINANCE: Profit-Sharing Strategy Can Also Be Used To Manage Tax Payouts

by Mike Allen

Monday, March 14, 2011

Things have been going well for employees at Indus Technology Inc., but they became even better after the local defense contractor adopted a plan that gives them a direct stake in the business.

In December, owner and chief executive Jim Lasswell established an employee stock ownership plan as a way to share the company’s success with its workers and to honor the wishes of his late wife, Kathy Sridhar, who died in 2004.

“She was all about finding a way for every employee to have a piece of the rock,” Lasswell said. “We started out with an incentive program of issuing stock options but they were a bit hard to manage for a small company.”

Last year, Lasswell researched the idea of sharing the company with workers through a legal structure called an ESOP. He then consulted with experts in the process and his management team, and set up the mechanism that gives his 300 employees a one-third ownership of the company.

The plan was announced in December, and following an audit and an independent evaluation of the company's value, employees will receive a statement showing the number of shares they own, and total value. Shares will vest after five years.

“They know that Christmas is coming, and they’re just waiting to see that statement,” Lasswell said, estimating it may arrive by late spring.

Incentive to Propel Growth

Besides providing a concrete benefit that can supplement their future retirement, an ESOP is a clear way to create even greater teamwork within a business and propel greater profits and growth, said Bernhard Schroeder, a director for the Entrepreneurial Management Center at San Diego State University.

In the 1990s, Schroeder and fellow partners in CKS Partners, a Silicon Valley ad agency, set up an employee stock sharing plan that proved to be a huge success.

“When we told our people they would have a share in the company everything changed inside the company,” he said. “Our costs went down, productivity went up, and sales went up. Once it happened people felt like owners and acted like it � everything got easier.”

The shares allocated to CKS workers also benefited them when the business went public in 1995, Schroeder said.

Robin Mickle, senior vice president at Indus, was also part of an ESOP at a former employer. Although the business was already employee-oriented, the owners wanted to set up a way to share the company’s profits, and retain workers, Mickle said.

When he left the company, Mickle said he took with him about $30,000 in cashed-out stock he received during his tenure.

A Hub for Creative Financing

San Diego is a crucible for the concept of employee ownership, and the birthplace of perhaps the largest ESOP ever in Science Applications International Corp., an engineering research firm founded by Bob Beyster here in 1969. Although SAIC Inc. went public in 2006, and moved its headquarters office to the Washington, D.C., area a few years ago, a nonprofit legacy organization he formed called the Beyster Institute continues within The Rady School of Management at UC San Diego.

The institute serves as a resource center for businesses considering adopting an employee-owned model, providing experts who have guided other businesses to an ESOP, and ongoing training and education on the various aspects of employee-owned enterprises.

Martin Staubus, associate director at the Beyster Institute, said one of the most common reasons companies adopt an ESOP is the current owners are looking to liquidate the business, while some partners may not want to sell just yet.

With an ESOP, a partner can sell their stake, leaving the remaining stake in the hands of the other partners and employees.

The most typical scenario entails a company setting up a trust, obtaining a bank loan to purchase all or part of the company’s stock, and repaying the loan with the company’s profits, Staubus said.

The money used to repay the loan is tax deductible which helps the company’s bottom line, as well as its corporate tax liability. Also, owners selling their shares to the trust aren't paying any capital gains, he said.

“It’s typically a very smart business move and the best option available to some owners,” Staubus said. “It’s really a win-win situation.”

This story is reprinted from the San Diego Business Journal. Click here to see original publication.