At the new Bilbo Baggins Restaurant in Old Town Alexandria, the name isn't the only thing that's unusual. The employes have agreed to shell out $2,000 apiece for the privilege of working there.
What they are buying is not just jobs as waitress or dishwasher, it's stock in the company. If Bilbo Baggins succeeds and if they stay on, they will begin within a year to supplement their wages and tips with a steadily increasing share of ownership in the establishment. If the restaurant fails, they get their money back and Hugh McGee's grand plan goes out the window.
McGee, a 31-year-old restaurant designer and consultant who studied employe motivation in a Dale Carnegie course, says he is committed to creating a restaurant where the workers will be full participants in planning, decision-making and earnings, and will develop long-term loyalty to the business.
"If this works in the restaurant business, it will work anywhere," McGee said. "And we want to make our plan a prototype for the industry."
With his plan for worker ownership at Bilbo Baggins, McGee has joined a growing list of businesses in the Washington area that are owned by their employes or give their workers blocks of stock in place of cash bonuses or pension plans. Nationwide, stock-bonus plans are said to be the fastest-growing form of employe benefit and incentive plan.
The scope and the form of employe stock ownership vary greatly, as do the motives of the corporations setting up the plans. Some firms are owned entirely by their workers; others give out relatively small allotments of nonvoting stock as a limited form of incentive bonus. In the aggregate, the stock-transfer plans represent a growing phenomenon in which more than 2 million workers have acquired a share of the ownership of the companies that employ them.
In the Washington area, the list of firms that have transferred full or partial ownership to workers through stock bonuses or reduced-price purchases ranges from such large corporations as the Bureau of National Affairs and MCI Communications to small, privately held companies such as Allied Plywood in Alexandria and Northern Virginia Steel Co. in Springfield.
The newest and smallest is Bilbo Baggins, a whimsical establishment on Queen Street named for a character in J. R. R. Tolkien's Hobbit stories who liked to eat six meals a day. Prices are modest, furnishings are simple and the entire enterprise was started on a shoestring, but as McGee said in an interview, "we don't want to be slick. Old Town is full of slick places. We just want this to be a friendly place where folks in the neighborhood can sit and enjoy themselves."
It is also a place where the workers participate in hiring and firing, switch back and forth from kitchen to dining room to stave off tedium, and are required to sing or play a musical instrument so they can help entertain the customers.
McGee is an heir to the social and economic theories of Louis O. Kelso, a San Francisco lawyer-economist who is generally credited with devising the Employe Stock Ownership Plan, or ESOP, as a means for diversifying the sources and ownership of corporate capital. Kelso's long-time disciple, Arlington attorney Norman Kurland, prepared the employe-ownership plan to be implemented at Bilbo Baggins.
Under that plan, McGee and his partner, Michael Armellino, the chef, will gradually reduce their ownership and increase that of the staff. They own 200 shares each, and the corporation owns the other 600 shares. Each employe has agreed to put up $2,000, either in cash or through salary withholding for a year, to buy 10 shares of stock, two from each of the partners and six from the corporation. hen, if the restaurant makes money, the workers will acquire additional shares through an ESOP, a bonus system approved by the Internal Revenue Service that gives the workers a stake in the company while allowing the corporation to deduct its contributions to the ESOP from its corporate tax liability. If a company is not profitable, there may be no contribution to the ESOP, but that is one of the reasons for establishing a stock bonus plan--motivation of the workers to increase production and efficiency.
McGee said the restaurant business, with a high degree of employe turnover, does not lend itself to worker enthusiasm or long-term commitment. But a restaurant owned by its employes could be different. "In the bathroom," he said, "a waiter walks out after using it. An owner wipes the sink."
He said it was possible to structure the ESOP at Bilbo Baggins so that he and Armellino could retain effective control but "I don't intend to. Running a restaurant is not what I want to do. It's too hard, it takes too much out of you. I'm in it only because I saw the opportunity to set up a good ESOP. If the concept works we can package it for the restaurant industry."
The ESOP was almost unknown a decade ago. Encouraged by tax legislation promoted by such supporters as Sen. Russell Long (D-La.), a vigorous supporter of employe ownership, ESOPs now exist in about 5,000 corporations, ranging from Fortune 500 giants to tiny, obscure firms like Bilbo Baggins.
There are actually two kinds of ESOPs, with infinite variations possible on both depending on the circumstances of the company involved. One kind consists of donations of stock to employes by a corporation as a form of bonus or benefit. This is commonly used by the owners of small, private firms to enable the employes who helped them build the company to keep it going after the founder retires, but it is also used in large, publicly traded firms to reward and motivate workers.
The other, known as a leveraged ESOP, consists of sale of stock by a corporation to an ESOP trust. The trust borrows money and buys stock for the employes, and the corporation repays the loan over time. The advantage to the workers is that they acquire stock at no cost to them. The advantage to the corporation of selling stock through a leveraged ESOP, as opposed to conventional borrowing, is that it can deduct not only the interest on the loan but also the principal from its tax liability.
The leveraged ESOP is used either to raise new capital for expansion or to enable workers at a failing corporation to buy all or parts of it. This kind of worker buyout of plants that would otherwise be closed has attracted the most attention to ESOP plans, but it is actually rare.
According to Corey Rosen, director of the National Center for Employe Ownership, "buyouts by desperate workers to save failing plants are about 2 or 3 percent of all ESOPs. Most are set up in profitable, ongoing companies as an employe benefit." he ESOP is perhaps the most common method of transferring stock to rank-and-file employes, but it is not the only method. Many corporations have been sold outright to their workers or offer other forms of stock acquisition, such as discount purchase options. Washington-area firms with substantial employe stock plans include:
MCI Communications Corp., the fast-growing telecommunications firm. MCI's 3,000 employes own about 1.6 million of the company's 47 million shares, and their holdings are worth about $52 million, according to Vice President William Conway. MCI has several stock plans, including discount purchase and an ESOP; last year, Conway said, MCI's contributions to the bonus plan amounted to 13 percent of the annual payroll.
"In a company like MCI," he said, "you want everybody pulling in the same direction. We compete every day with the biggest company in the world--AT&T--and you want to make sure the workers and the chairman of the board are on the same side."
Northern Virginia Steel, where founder Bernard Steinberg got Kurland to set up an ESOP that would gradually transfer his holdings to the 75 employes. Like many small firms, the company had no pension plan, and the workers faced the prospect of having the company either close or be swallowed up by a conglomerate once Steinberg left. Under the ESOP, the stock is transferred to the workers, and it is shielded from taxation.
Allied Plywood, which is in a similar situation as founder-owner Edward Sanders approaches retirement. The corporation makes annual tax-deductible contributions to the ESOP trust, which uses the money to buy Sanders' stock. The 22 employes now own about 60 percent of the shares. Robert Shaw, vice president, said that "if Ed wanted to get out some other way, we couldn't keep the company going, we would lose out. This way we know we will have a job." Allied's workers are said to be tripling their wages through their stock acquisitions and monthly bonus payments.
Wright-Gardner Insurance Co., a Hagerstown brokerage with 35 employes whose chairman, Fred Wright, is an enthusiastic booster of ESOP. "It's the most exciting thing that's ever happened on the American scene," he said. "It's a fantastic, incredible thing to do--imagine what your attitude would be if your company would do the same thing for you."
He said that in the 46 years since he started selling insurance, "the equity has just continued to accumulate. The employes play a large part in that, but they only get their salary. It isn't exactly fair." With the ESOP, he said, "the agency improves, the workers get their share, and I get my share. It's a lot of fun working in that atmosphere."
Science Applications Inc., a California-based high-technology consulting firm that has its own high-rise office tower in McLean. About 85 percent of SAI's 7 million shares are owned by employes, either through company-subsidized stock purchase or through SAI's ESOP, and all shares are voting shares, according to vice-president Michael Higgins.
The employes can buy and sell their stock through an in-house stock brokerage that conforms to Securities and Exchange Commission requirements and is registered in every state where SAI has an office, Higgins said.
Bureau of National Affairs Inc., a specialty publisher with 1,400 employes. All BNA stock is owned by present or retired employes, company president William Beltz said, and has been since the late publisher and columnist David Lawrence sold it to them in 1947.
The Consumers United Group, a Washington-based insurance, mutual fund and consumer-service organization that limits its profits to an annual maximum of 5 percent and is committed to "guaranteed continuous employment," without layoffs, for its workers. According to president Robert Freeman, the employes own half the shares, and "the rest is set aside for the cooperatives and associations that support the ideals and philosophy of the group."
When The Washington Star folded last summer, a last-minute effort was made to save it through the formation of a leveraged ESOP, but, according to ESOP experts such as Kurland, it was doomed to fail because the liabilities were too great and the time too short. Rosen, director of the National Center for Employe Ownership, said he knows of no firm in the Washington area that has used a leveraged ESOP to turn a failing enterprise over to employes, but some well-known companies have used that method elsewhere.
The Rath Packing Co.'s plant in Waterloo, Iowa, the South Bend Lathe factory in South Bend, Ind., and, most recent, General Motors' Hyatt Bearing Plant in Clark, N.J., were saved from shutdowns by worker buyouts. South Bend Lathe, ironically, was hit by a strike in 1980 as the owners, in effect, picketed themselves in a dispute with the management they had installed, a development that shocked the ESOP fraternity.
"There is no reason why, just because a company is employe-owned, basic worker-management relationships are necessarily going to change," Rosen said. A worker-owned company, he said, is like a democratic political system, in which "theoretically there is no distinction between governors and governed but in reality there is. Democracy works by setting parameters, which means some people aren't going to like the decisions that get made." he hope of improved worker-management relations, in fact, is only one reason for setting up an ESOP or other stock-transfer plan. It can also be done to raise low-cost capital, encourage productivity, reward loyal workers, unload unprofitable subsidiaries, save money on taxes or, as Kurland put it, "keep control of the company in friendly hands."
Political personalities as different as Long and Ronald Reagan have praised the worker-ownership concept as an appropriate way to spread the benefits of the nation's economy around within the framework of the free-enterprise system.
Critics, however, have raised several objections. They argue that the tax incentives for ESOPs, which were expanded by the 1981 tax act, amount to a taxpayer subsidy to profitable private corporations. They say ESOPs can be inflationary, because if leveraged they increase debt and if treated as additional compensation for employes they have to be recouped in price increases. And they say that ESOPs in publicly traded companies, which give stock to workers without making them pay for it, dilute the value of the holdings of stockholders who bought their shares.
Supporters such as Long, who has often used his influence on the Senate Finance Committee to expand the tax benefits of ESOPs, argue that the long-range benefits to society from expanded worker ownership outweigh the problems.
"The overwhelming majority of workers do not feel that an increase in productivity does them any good," Long said last year. "They feel that it is something for the other guy--for the guy who owns the plant. . . . If we are going to make a great majority of Americans feel that they are being benefited by these tax advantages and by these efforts to make big investments in plant and equipment, then we are going to have to find a way to see to it that the rank and file have a chance to own some of it and participate. That's what employe stock ownership plans are all about."