|Photo: Gary Laufman|
Don't compare Harrell Remodeling's 1-year-old employee stock ownership plan (ESOP) to that of United Airlines, Enron or WorldCom. Unlike those companies, says Iris Harrell, president and CEO of the nearly 18-year-old Mountain View, Calif., firm, "We didn't become an ESOP company because we needed financial support. We wanted to find the best way for Harrell Remodeling to go on for the next two decades."
Beginning an ESOP: A few years ago, as Harrell hit her 50s, she and her partner, chief operating officer Ann Benson, began investigating succession strategies.
"We don't have children," Harrell explains. "We want the company to go to the people who have built it." She emphatically did not want an outside buyer to come in and take over the 52-person firm.
"We have a unique culture," she says. 'Culture is really values and attitudes. I don't want to be in the position of choosing someone who has the money but doesn’t have the values."
Any company owner thinking of starting an ESOP should thoroughly research the financial feasibility of it, says Harrell vice president Ciro Giammona, CR. There are significant upfront costs plus administrative fees and the annual cost of a third-party evaluation to determine the stock's value. (According to the National Center for Employee Ownership, $20,000 to start and several thousand more annually is typical.) Per tax regulations, the company also must be an S corporation or a C corporation.
Harrell's management team began researching ESOPs by attending regional and national ESOP conventions to find out how different companies had implemented their plans and discuss options with specific plan administrators. "You really need some financial advisers to help you put it together," Giammona says. Harrell Remodeling hired Tony Mathews, a consultant with BCI Group, an Appleton, Wis.-based ESOP implementation and administration company.
The Harrell ESOP: To be eligible for Harrell’s plan, an employee must be 18 years old and have completed six months of service and 500 hours of work. Employees must complete 1,000 hours of work annually to maintain eligibility.
Employees do not have to give up part of their salary; rather, half of the company's net profits in a given year go toward purchasing stock for the ESOP. "The company needs to be profitable in order for the ESOP to gain more shares," Harrell says. "You pay as you go." Shares are distributed in proportion to salary or wages. Employees will be 100% vested after five years of service. If someone leaves the company after becoming vested, the ESOP trust would buy back the employee's shares and redistribute them among the remaining workers.
The ESOP now owns 2% of the company. Harrell estimates it will take a decade to reach 100%. "The 100% ESOP-owned company that is an S corp essentially doesn't have to pay taxes, which motivates everybody," she says.
Making the ESOP commitment did change retirement benefits. The 401(k) still exists but depends solely on employee contributions, without the former 25-100% company match. "We have quit matching so we can use the profits to buy the stock," Harrell says.
The ESOP education plan: After holding its first stock allocation meeting in April 2002, Harrell Remodeling has continued to make the ESOP a regular point of discussion. A new ESOP committee composed of people at different levels from different departments brainstorms ways to educate the new owners.
At quarterly meetings, the entire staff reviews performance charts and graphs to see the impact on the stock. They also relate the business finances to personal finances to improve understanding of terms and concepts. Weekly or biweekly meetings for the sales, production and administrative teams include an "ESOP minute" when one quick fact is discussed.
"It took Iris 18 years to be the owner she is," Giammona says. "This gradual transition gives people time to get up to speed."
After just one year, Harrell already notices a difference in employee attitude. "I've seen an incredible diligence," she says. "They want the clients to be happy, but they also want the clients to be happy to pay. A maturity is starting to happen."
For more information on ESOPs, visit www.nceo.org.