Nearly 25 years ago, the senior management of what is now known as PadillaCRT needed a strategy to buy out retiring senior executive-owners that would guarantee them a good retirement without having to sell to an industry consolidator or to borrow so much that it would mortgage the future for the next generation.
The company’s leadership decided to create an employee stock ownership plan (ESOP) that was funded sufficiently by 2000 with accumulated pretax profits, recalled CEO Lynn Casey, an architect of the plan.
“We created an ESOP to ensure independence and continuity,” Casey said. “The ESOP also provided another point of distinction for our employment brand. Candidates were intrigued that a company would spread its ownership companywide. They were — and still are — drawn to an ownership culture where employees have a right — and a responsibility — to think and act like they own the place. Because they do own the place. Every single team member has the added incentive to be our best for clients because [when] we succeed, they succeed.”
Many of the firms on this year’s Top Workplaces list have some sort of profit-sharing with their employees, but although the number of companies with ESOPs is growing nationally, few have the kind of ownership structure found at PadillaCRT. The growing communications and brand-management agency with 240 employees made the list of workplaces that fit the national criteria set by WorkplaceDynamics but did not place among the top 150.
Casey said a good culture, an effective growth plan and management willing to share some of the wealth are as important to employee commitment as the type of ownership.
Employees aren’t getting rich off the ESOP plan, but the money does add up over time, Casey said.
There are other benefits of a well-run ESOP.
“We review financial statements at monthly staff meetings and educate everyone on how we make money, spend that money, and what employee-owners can do to keep more of it within the company,” Casey said. “A well-run ESOP company also encourages a mindset of being part of something bigger than yourself. No major decision we make goes down without an explanation and in most cases lots of input, and ideas and informed opinions.”
Padilla also continues to pay performance-based bonuses — and the company has performed.
Padilla last year had revenue of $34.8 million, a compound annual rate of 15.5 percent since 2011. Profits have grown at a 13 percent rate.
“ESOPs aren’t for everyone,” Casey said. “They require financial discipline and administrative burden. They require extra time and energy to ensure that team members are engaged at a high level. I do believe in spreading the fruits of the labor and the importance of a creating an ownership culture.”
ESOPs, which work best for profitable, growing firms, also can boost earned wealth of working stiffs whose wages have stagnated for 30 years.
“Wealth has increased only for people who have capital shares, a share of ownership,” Joseph Blasi, a national ESOP expert and co-author of “The Citizen’s Share: Reducing Inequality in the 21st Century,” said in 2014. “The solution is to broaden the pool of people who have access to shares of profits and their company stock. We’re not talking about a 401(k) retirement plan where employees use their own wages.”
He argues that ESOPs are one solution to reduce economic inequality.
Several economic studies found ESOP-owned companies outperform other companies. And executive pay is more moderate in ESOP companies.
Corey Rosen, a former congressional staffer who started the National Center for Employee Ownership (NCEO) in 1981, said ESOP companies also tend to generate more in tax revenue to the U.S. Treasury once they move past tax breaks for acquiring the company from the seller.
Last spring, NCEO held its annual conference in Minneapolis for a record 1,600 attendees.
Minnesota is fertile ground for ESOPs. Two other companies with ESOPs are Christensen Group Insurance of Minnetonka and Windings Inc., a New Ulm manufacturer. Both those firms were founded by owners who were willing to transfer ownership slowly to employees who learned about the rights and responsibilities of company ownership.