Employee Stock Ownership Plans (ESOPs) are an attractive ownership transition strategy for many reasons. Key among these, ESOPs can help selling owners preserve the company culture and legacy they’ve worked so hard to establish. In an ESOP transaction, the ESOP Trust becomes the shareholder of the Company versus selling to an outside party. With ESOP ownership, employees are protected from drastic change in company culture, operations and dynamics that often occur with an outside buyer—allowing for a continuation of the values instilled by the selling owner. Additionally, in many cases the selling shareholder(s) stay involved in the day-to-day operations of the company.
Human capital is a critical factor in the financial success of any company. An ESOP turns employees into employee-owners who have a greater stake in the company’s performance—the better the company does, the more employees will benefit financially. Employee-owners are motivated to improve performance and productivity. In this way, an ESOP creates a direct connection between employee’s daily work and the company’s overall success; the employee-owners become value drivers.
To ensure the ESOP’s success, employee-owners need to embrace their role as value drivers and understand how their contributions impact the company and their own financial well-being. However, without a strong understanding of finances (both personal and business), employees may feel less confident in their ability to contribute, develop as a leader and make the most of the ESOP. Read on to learn how investing in employee financial education drives ESOP value.
The Cost of Employee Financial Stress
Some employers feel that employee education is too expensive or time-consuming. Others don’t want to overstep, assuming that finances are a personal issue which employees prefer to handle independently.
What employers may not be thinking about are the costs of not implementing a program to promote employee financial literacy and wellness. According to John Hancock’s 2022 study of stress, finances and well-being,[1] financial stress has a major impact on workers’ productivity—resulting in higher costs to employers. For example,
- 58% of workers surveyed said finances are a cause of stress
- 40% said they’d be more productive if they didn’t worry about their finances at work
- 26% said they spend three or more hours per month on their personal finances while at work
With these factors, John Hancock estimated a 26% increase in the cost of financial stress since 2019. These statistics make it clear that there is a need for employee financial education; and, if this need goes unaddressed, employers are the ones who pay.
Translating Personal Financial Knowledge to ESOP Financial Matters
You may be wondering how employees’ personal financial literacy and wellness translate to the success of an ESOP company. Often, the business concepts dealt with by company leaders are based upon a strong foundation and understanding of finance. Without this foundation, how can we expect employee-owners to understand business concepts like value drivers?
Implementing a personal finance-focused education program can help close the gap, as strong personal finance skills, knowledge and habits can be transferred to the finances of the company. For example, if an employee-owner in your program learns to budget and balance a checkbook, they are likely to have a better understanding of the company’s budget and cash flow. If an employee-owner can construct a family balance sheet that includes assets, liabilities and net worth, it stands to reason they could apply that knowledge to the company’s balance sheet, as well.
Most importantly, a financial education program empowers employee-owners through knowledge. With a strong financial foundation, your employee-owners are empowered to move forward with confidence, recognizing how their contributions drive company value, increase share prices, and boost the value of their ESOP retirement asset. Perhaps this retirement benefit may also alleviate some of their personal financial stress, leading to more productivity and engagement at work.
Not to mention, a strong and measurable financial education program has the potential to bring advantages in recruitment, retention, and more, as the program demonstrates that the company cares about the employee-owners’ financial wellness—an important aspect of their overall well-being.
Helping You Get There…
When it comes to your ESOP, you’re not just educating employees, you’re developing company owners and future leaders. Prioritizing employee education and engagement has positive outcomes for both the employee-owners and the company alike. Additionally, as time goes on, your education program can evolve beyond personal finance, to cover other topics that are relevant to both your employee-owners and the success of your ESOP.
Our advisors are dedicated to helping you get there with our ESOP advisory services, providing assistance at all stages of the ESOP—from plan design to administration. To learn more about ESOPs and their benefits to both owners and employees, connect with Boulay’s ESOP Leader, Dan Markowitz, today.
[1] John Hancock Study of Stress, Finances and Well-Being (August-September 2021). https://retirement.johnhancock.com/us/en/financial-stress-survey