Investing in Your Staff

June 1, 2012
Making employees part-owners of your business can help it grow long term.

Fresh off the sale of his parts distribution company, and with his full attention now on his collision repair business, Shawn Moody wanted to grow aggressively.

Moody’s Collision Center had one location and a handful of employees at the time. To start the expansion, Moody didn’t focus on sales, marketing or customer service, as many shops do. His mind was on employee relations, and a belief that hard work deserves financial reward.
“We know if co-workers are happy and motivated, the customer satisfaction will follow,” Moody says. “We just wanted to become the employer of choice in order to recruit and retain the best people—that’s what grows a business.”

Moody takes that seriously. And he says it is his responsibility as an owner to ensure his employees, their families and futures are financially stable. He sifted through several employee benefit and compensation packages to make that a reality. He settled on an option that he thought would not only financially benefit employees, but also become a better way to lead the company—an Employee Stock Ownership Plan (ESOP).

Moody’s ESOP, which is set up through the Employment Retirement Income Security Act (ERISA) and regulated by the U.S. Department of Labor, is a separate trust fund that creates and stores the company’s shares of stock. Thirty-four percent of the company’s stock is distributed among all active employees into retirement plans, making all employees minority shareholders in the organization. They earn shares of stock in proportion to their individual annual earnings.

Moody says giving employees financial ownership in the organization proved to be the best leadership strategy he’s ever implemented. It’s played a strong role in improving the shop’s culture, retaining workers and boosting productivity. All of those benefits, Moody says, have grown annual revenue roughly 18 percent each year since the implementation of the ESOP in 2003. The company now operates seven locations with 100 employees.

“What we’ve done here is a great blueprint for collision repairers across the country to solve their employment-related challenges,” Moody says. “The ESOP has maximized our shop’s human potential by maximizing the self-worth, dignity and well-being of our employees. They’re able to trade sweat for equity.”

In other words, Moody says, employees are self-motivated on performance and focused on business success now that they have personal finances at stake.

One big challenge of leading a business is creating a high performance work environment. ESOPs create a culture of co-workers who are open to new things, Moody says, because they know there is financial incentive available if the company grows and improves. They share in that success, which leads to increased revenue, reduced turnover, increased productivity and long-term sustainability. Moody’s experiences have been in line with some of the common statistics about ESOPs:

Revenue: ESOP companies grow revenue at a rate 2.3 percent higher than non-ESOP companies, according to a study from the School of Management and Labor Relations at Rutgers University.

»Moody’s Experience: Moody has grown revenue by 18 percent annually since adopting the ESOP model in 2003.

Turnover: A study from General Social Survey revealed that 24 percent of employees at non-ESOP companies intended to leave their jobs, compared with only 13 percent at ESOP companies.

»Moody’s Experience: Moody says his older, seasoned technicians take the initiative to spend time with the entry-level technicians. They explain that the company can be a long-term career, not just a job, and they will have better retirement benefits by sticking with it. That has helped retain people for the long haul.

Productivity: ESOP companies are 5.3 percent more productive than non-ESOP companies, according to the Rutgers University study. In addition, 84 percent of ESOP Association members, who represent 11,000 ESOP companies, report motivation and productivity increases.

»Moody’s Experience: Moody says every employee has access to business performance and financial information. Understanding that poor performance affects them financially, employees will address problems and brainstorm solutions on their own when they notice a slumping aspect of business.

“As the leader of the organization, that relieves a huge amount of stress and oversight knowing that people are self-motivated to do that,” Moody says.

Sustainability: According to a study conducted by the University of Chicago, ESOP companies laid off workers at a 3 percent rate during the recent recession, compared to 12 percent for non-ESOP companies.

In addition, studies from the ESOP Association illustrate that ESOP companies experience more information sharing, communications and involvement in decision-making among employees compared to non-ESOP companies.

»Moody’s Experience: Moody says his older technicians are highly motivated to help train and teach the young technicians. That’s because they know the new technicians will be supporting their retirement funds once they’re gone.

“There’s a vested interest among our older workforce to groom the next generation,” Moody says. “They’re financially driven to keep the success going. It kind of becomes a legacy business.”

Although performance increases among employees generate a healthier business, organizational leaders have to worry about their own paychecks, too. With an ESOP model, it does mean you’ll take home a smaller percentage of profit, but that doesn’t necessarily mean you’ll make less money.

“You should expect your shop’s earnings to grow if you have engaged employees,” says Matthew Ohrnstein of consulting firm Symphony Advisors. “You’ll be earning a smaller share of profit, but if your employees are growing the company, you’ll be taking it from a larger pie.”

Therefore, Ohrnstein says, it’s possible to make more money owning a portion of a growing business compared with owning 100 percent of a stagnant business.

That’s been true for Moody. His co-workers do own 34 percent of the company’s stock, but the business has tripled in size. He says he’s making more money now than prior to the ESOP.

Moody says shop owners that adopt an ESOP model have to be open and transparent about financial and business information with employees, since they are, in fact, minority shareholders in the company. But he’s been practicing open management for 15 years now, and says it’s a better way to lead business anyway.

“All of our revenue, profit and key performance indicators (KPIs) are shared with everyone on a quarterly basis,” Moody says.

Giving access to that information allows employees to better understand the business, and identify issues that need to be addressed when business is stagnant.

In addition, Moody says each technician’s monthly efficiency and utilization reports are shared throughout the company. It makes employees more aware of how their performance affects business overhead, says Michael Keeling, president of the ESOP Association.

“If you own a house, you’re going to take much better care of it than if you rent a house,” Keeling says. “If employees don’t feel connected to what they do, they’re not likely to give it as much heart and soul.”

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