I am intrigued by companies doing cool and creative things with their benefits packages. A previous post discussed Yankee Home Improvement, and how their Race to the Riviera sales contest has dramatically improved productivity in 2019. Here is a link: https://www.millbrookbenefits.com/the-power-of-creative-benefits-ideas/
Delcie Bean considers himself a “serial entrepreneur.” He started the company that eventually became Paragus Strategic IT when he was in high school in Amherst. Initially, he was doing home computer repairs, but over time, it evolved into the commercial market. In 2011, Paragus was born, and the company was exclusively providing outsourced IT solutions to employers in the Pioneer Valley. In 2016, Delcie decided to sell 40% of his company to his employees through an employee stock ownership plan, or ESOP. I think ESOPs are both cool and interesting, so I asked Delcie if he’d chat with me on the phone for a few minutes. He was kind enough to indulge me.
To begin, an ESOP is a type of employee benefits plan, similar to a profit sharing plan. The company sets up a trust fund, and shares of the company are deposited. Shares in the trust fund are allocated to individual employee accounts.
I asked Delcie why he set the ESOP up in the first place. He cited two reasons: culture and a gamble.
Culture
Everybody at Paragus was young, like Delcie, and he felt like they were all contributing to the growth of the company. He thought there was a “disconnect” because he was the only person to benefit from an increase in the value of the company. “It just didn’t feel equitable,” he said.
The Gamble
He really felt that an ESOP would help him to grow the business, while at the same time positively impact recruiting, retention, and employee engagement. “It’s better to own a smaller portion of a larger company than to own 100% of a smaller company.”
The jury is still out on whether or not the gamble has paid off, but Delcie cites an immediate improvement in the quality of candidates that he can attract to work at Paragus. People really like the idea of becoming an owner where they work.
As far as retention goes, Delcie says that he doesn’t expect to see any tangible results until after the “3rd benefit statement.” The company is valued for the ESOP once per year, and it takes a couple of years for the numbers in each participants’ statement to become meaningful. His 3rd statement is due this July, and he really thinks that the light will really go on for the partners (he refers to all employees as “partners”) about how significant the value of the ESOP can be over time.
I mentioned that I thought it was interesting to refer to everyone as “partners,” even though they obviously are. Delcie said it’s really important to find ways to reinforce the ESOP to employees. “If you’re going to do it, you need to fully embrace it with everything: vernacular, financial transparency, everything.” To this end, Delcie works hard to keep his employees engaged. For example, once per week he sends a short video to all of his employees, filling them in on what went on in the company in the past week. He also regularly shares financial information with them and involves them in company decisions. He said a couple of times, “You can’t just sign the papers (for the ESOP) and expect things to change,” so he makes an effort to continuously reinforce the ESOP.
I’d heard from a client that setting up an ESOP can be difficult. Delcie describes the process as “long, complicated, and expensive.” He followed with, “It’s not for the faint of heart.”
When Delcie first rolled out the ESOP, he had to cancel his SIMPLE IRA plan, which he replaced with a 401(K) with no employer contributions. He tells employees, “You put your money into the 401(K), and we’ll put our money into the ESOP for you.”
He told me that the employee reaction initially was mixed. People were pretty excited to own a portion of the company, but they didn’t completely understand what it meant. There was some concern that employees might be on the hook financially if there was a downturn, but Delcie assured them that ERISA, which governs ESOPs, gives them much of the up side of the growth of the business, but very little of the down side. He said, “There is a difference between thinking this is really cool and understanding exactly what it means.”
Delcie thinks there are two reasons for an employer to consider an ESOP: culture and succession planning. If the goal is to impact culture, it’s important for the management team to actively reinforce the ownership and value of the ESOP with the employees. If the goal is simply succession planning, he felt that the active reinforcement was less critical.
I asked if he’d do it over again, and if so, what would he change. He said he would definitely do it again, but he recommends others might consider doing 3 things differently:
- Start with a smaller percentage. Delcie sold 40% of the company to his employees. He said he could have accomplished the same culture goals with 20% or 25%, and the transaction would have been easier. He noted that you can always increase the amount later.
- Only hire advisors who are familiar with ESOPs. Delcie said that he might have saved time and money if he had recognized the importance of using bankers, lawyers, and accountants who are really familiar with ESOPs.
- Be realistic about how long this will take. He said it takes many months to set an ESOP up properly.
On a final note, Delcie told me that one unexpected advantage of the ESOP is the vibrant community of ESOP employers in the Northeast. For example, Harpoon Brewery in Boston is structured as an ESOP, and they have collaborated with Delcie and shared best practices. He said, “Suddenly you’re part of this club of companies that are interested in your success!”
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