Victor Aspengren is a vice president at Prairie Capital Advisors Inc.
A company has been transitioned to an employee stock ownership plan (ESOP). The company now has an ESOP, which is technically a defined contribution plan governed by ERISA. The challenge to the leaders in the company is: Do they promote the company as an ESOP or the fact they are employee owned?
In most ESOP companies, the terms ESOP and employee ownership are used freely to mean the same thing. This creates confusion to the employees. The simple fact is that the terms ESOP and employee ownership are not interchangeable. They are two distinctively different terms and how they are interpreted by employee owners is critical.
An ESOP is technically owned by the ESOP Trust, not the employees. Being an employee owner is tied to the culture of a company. Day to day decision making does not have to change at all. The only items where there is truly a vote are the following as related to IRC 409(e):
- approval or disapproval of any corporate merger or consolidation
sale of substantially all assets of a trade or business, or
such similar transaction as the Secretary may prescribe in regulations
Ultimately, even in these situations the ESOP trustee can override the vote based on their fiduciary role.
Companies that clearly differentiate the terms ESOP and employee owner have much stronger cultures. It requires a much higher level of training and education and requires a different type of leadership. Employee ownership is about having input, being valued, and understanding the business through training and financial literacy.
The following is an example that illustrates this point: A new 25-year-old employee is hired. Is their interest focused on the ESOP or what it means to be an employee owner? The answer to this question will be directly linked to their tenure in the company. What's the right answer... what would the answer have been when you were 25?