Today, trends in management, the economy, and the workforce are changing. Traditional compensation plans such as pension plan are no longer attractive for employees. A movement toward “non-retirement” plans- that is, contribution plans that provide saving and incentive benefits to employees without a specific funding by the employer, such as PROFIT-SHARING PLANS, stock bonus PLANS and EMPLOYEE STOCK OWNERSHIP PLANS. Some of the reasons for this trend include.
1.Increasing acquisition and dissolution discourage long-term employer commitment.
2.Competition and cost pressures to minimize wage and benefits costs.
3.Increased mobility in workforce.
4.Employers are using more part-time employees, leased employees, and independent contractors.
5.Increase in family with two wage earners.
This report will focus on Employee Stock Ownership Plan (ESOP).
In an ESOP, the employer contributes stock to the plan. Employer’s contribution are not necessarily dependant on profits; benefits are distributable in the stock of the employer company. There are two forms of ESOP– a stock bonus ESOP or a leveraged ESOP. In a stock bonus ESOP, the employer contributes company stocks to the ESOT (Employee Stock Ownership Trust) and does not use it for obtaining funds. In a leveraged ESOP the employer can use the plan as a means of raising funds on a tax-favoreds basis. Shares of stock are allocated to participants’ accounts under a formula that must meet nondiscrimination requirements. Some ESOP also provide for after-tax employee contributions or a salary reductions. The value of each participant’s account in an ESOP is stated in terms of certain number of shares of employer stock.
This paper talks about how the employer-employee relationship has evolved over a period of time and how it is changing in the days of recession. This relationship is mostly governed by the decisions an organization takes about its employees and how the leader of the organization win the trust of their people in the bad times. Gone are the days when a person would join an organization and continue ...
There are benefits to both the employer and employees in having an ESOP.
Some of these benefits to the employer are:
1.ESOP allows an employer to indirectly borrow money from a bank and repay the loan with fully deductible repayment amounts.
2.Company can sell its stock and redeem it without reducing the true value of the stock.
3.The company can increase its working capital, cash flow, and net worth..
4.An ESOP assists in establishing and maintaining a stable, high performance workforce.
5.It can act as a medium to retain desired employees.
6.An ESOP can be a decisive factor in motivating employees and building loyalty.
As stated above an ESOP is also beneficial to employees as well, some of these benefits include:
1.Participation in any ESOP gives employees equity opportunities with no cash investment.
2.Employees have a chance to voice their views at the policy making levels of the organization.
3.Employees pay no tax on stock until distribution is made.
4.ESOP increases motivation by directly relating the value of their retirement benefit to the value of the shares of stock allocated to their account.
In 1986 there were approximately 8000 companies which had ESOPs with equity into the hands of approximately 11 million employees. Today there are over 11,000 companies, including big companies such as United Air Lines, PepsiCo, Merck, Bristol-Myers Squibb, Bank of America, Chase Manhattan, and Starbucks, who have ESOP putting about $1 trillion in equity into the hands of approximately 17 million employees. Statistics show that companies with Employee Stock Ownership Plans are 1.5 times as profitable as comparable conventionally owned companies. One such success story has been that of Starbucks.
When Howard Schultz bough the company and took over as a CEO in 1987, Starbucks was a local business with 6 stores and less than 100 employees. Schultz wanted the employees to have a chance to share in the benefits of growth, and to make clear the connection between their contribution and growing value of the company. Keeping this in mind his goal was to link shareholder value with long term rewards for his employees and thus giving employees a chance to create their own value. In 1991 Starbucks introduced the “bean stock” option to the employees. Even with no guarantee that the option would ever be worth anything, “bean stock” affected peoples attitudes and performance immediately. They started coming up with innovative ideas about how to cut cost, to increase sales, to create value and the most important they spoke to the customers from the heart as partners in the business. Six years later, after the introduction of “bean stock”, in 1997 Starbucks had more than 13,000 stores and 25,000 employees with stores in cities all over North America as well as in Tokyo and Singapore. Starbucks sales and profits have grown by more than 50% a year for 6 consecutive years. According to Schultz, Starbucks’ secret weapon has been giving stock options to everyone, from managers to baristas. Schultz believes that giving stock options helps the employees to see a connection between their work and Startbucks’ fortune.
401 (k) Plans There are many economic issues facing the nation today. While some are extremely important in determining how the economy is balanced, others are not. Although this is true, that does not necessarily make these lesser important issues obsolete. Take, for example, the recent issue of corporate leaders matching contributors to the 401 (k) plan with company stock, instead of with cash. ...
Statistics show over and over that ESOPs increase profitability and help retain talent. Besides Startbucks couple of such examples are that of United Air Lines (UAL) and Texas Instrument (TI).
In 1994, UAL corp., in exchange for steep pay cuts introduced ESOP. According to Captain Curtin of UAL “what he as seen is record $4.9 billion swap; uninterrupted labor peace, job security, worker clout in the boardroom, and expanding air line that is the worlds largest and often, most profitable, and a retirement nest egg fro 80000 present and past employees”. Similarly, TI was faced with a problem of losing top technical talent to the competition. As a result TI introduced stock options to target most talented employees. The company gave managers the authority to grant stock options to their best performers and as a result there was 8% decrease in turnover in key jobs in five years.
eCommerce Companies and Stock Valuations 1. Introduction A hot topic in today’s business culture is eCommerce. Experts argue about whether eCommerce will change business, whether or not it is a fad, and what viable strategies there are in a business world that is changing at the speed of idea generation. One thing that nobody argues about is the fact that eCommerce oriented companies have stock ...
Overviewing the success story of Starbuck and past surveys we can conclude that a major reason for the profitability of companies is significant amount of employee ownership along with the kind of management that first entertains employee ownership ideas, and then implements them and makes them work. Managers with such views and interests may also be the kinds of managers who lead their organizations in attaining significant shares of their markets and high levels of profitability, Howard Schultz is an excellent example of such a CEO. As he says “If I hang my hat on one thing that makes Starbucks stand out above other companies, it would be the introduction of “bean stock”. With its introduction we turned every employee of Starbucks into a partner. I wanted to find a way to share both the ownership of the company and the rewards of financial success with the people of Starbucks”.