Butch Munson has worked at the same metal fabrication company for 43 years, and in a few years he plans to retire. He’s had a good career at LeFiell Mfg. Co., a tube and specialty fabricator in Santa Fe Springs, Calif. Sure, the shop has had its ups and downs, but generally the company has always found a way to do things better and faster. The firm’s won numerous awards and has gained a reputation as a supplier manufacturers can count on. Most important, the financial well-being of every employee, including Munson, has benefited.
After all, they own the company.
LeFiell was one of the 17 original companies to take advantage of what’s known as an ESOP, or an employee stock ownership program. Written into federal legislation in 1974, an ESOP essentially gives employees a stake in the business. Every pay period, an employee is given a certain amount to put into an ESOP trust, which is managed separately from the company for the sole benefit of employees.
I called Munson this week after discovering the veteran fabricator had won the ESOP Association’s Employee Owner of the Year, an award he accepted earlier this month in Washington, D.C. Munson is passionate about ESOP. He’s what employee-ownership advocates call an ESOP champion. He spells out the program’s benefits to anyone who asks. He even is willing to show anyone his retirement account statements. He’s done well for himself, and he’s eager to show younger employees that they can do well for themselves too.
In recent years retirement planners haven’t looked too kindly on the ESOP, because it goes against that most basic of investing principles: Diversify your portfolio. The skepticism is understandable, considering the corporate scandals and draconian business practices of recent years. Just think of Enron employees who thought they’d retire early, only to find their nest egg obliterated with Enron’s stock. Then there’s the United Airlines debacle where the company broke its promise to pay pensions. All this made people praise programs like the 401(k), in which the employee, not the employer, is put in charge of his or her retirement planning. The thinking was that you can’t trust your retirement to one company. The solution to reduce risk was to diversify your investments.
Munson countered that ESOPs work for certain companies, but there needs to be clear communication and support.
“You have to think like an owner and be an owner,” he said. “The more money you make for the company, the more money you get in your ESOP.”
When it comes to communication, employees should know exactly what their ESOP means. They’re given a slice of the company in the form of stock, but that slice doesn’t mean managers give up control. What it does mean is that if the company does well, the employee benefits financially, so every person—from the front-office worker to the shop floor operator—has an incentive to continuously improve. The smarter they work, the more financially secure they become.
It goes beyond a lot of other common employee-incentive programs out there, such as profit sharing and bonuses, because unlike those, ESOP companies are required to contribute a certain amount of stock to employee retirement accounts no matter what. That amount may fluctuate, depending on the stock’s value, but ESOP companies can’t stop contributing. If they do, they’re breaking the law.
Still, to make the ESOP concept work, Munson said that LeFiell must be entirely open. As stockholders, employees may not have complete company control, but they do have a right to know as much as they can about their primary retirement investment.
For this reason, LeFiell reveals detailed financials to everyone, making every department and employee accountable. It also provides something particularly special—full financial support to any employee looking to better his or her job skills through further education. The right education makes employees more knowledgeable, which in turn helps them come up with better ideas, be it for a quoting procedure or a forming press setup.
Smart, diversified retirement investing is admirable, to be sure. But what do people actually do to earn that return on investment? Most people couldn’t name all the different company stocks they own in their 401(k)s. They really don’t have any skin in the game. It’s a bit like gambling, really. Sure, they’re told that this or that fund is a good investment, but they really don’t know why.
ESOPs, on the other hand, do give employees skin in the game. When Munson retires from LeFiell, he’ll know where his nest egg came from. He told me of a few efforts he’s spearheaded over the years—setup time reduction and other efficiency efforts—that directly contributed to the bottom line and, hence, his own financial well-being. Come retirement, he’ll know that it was his hard work, and the work of his fellow employees, that got him to where he is.
And really, what could be more American than that?