Along about the third week of every month, Ed Sanders chalks a note on the blackboard at Allied Plywood, Inc., in Alexandria, letting the employees know the company has reached its first goal for the month-it has wholesaled enough plywood to cover expenses.
Every day after that, more numbers go up on the board, indicating through a point system how much money the company is making.
The blackboard is watched closely by Allied's 19 employees because the company's profitability is directly related to their paychecks.
Once the company covers its costs, 30 per cent of the gross profits for the month goes to the full-time employees; the 15th of every month they get a check for their share of the previous month's earnings.
Last year, the monthly incentives-and yearly bonuses when final profits are figured-added up to $12,000 per employee, enough that with what Sanders acknowledges are modest base wages, some of the warehousemen and truck drivers made $28,000.
"That is already one of the most exciting employee reward structures anywhere," said Norman Kurland, a Washington lawyer and corporate finance specialist, who recently set up another incentive for Allied plywood.
The truck drivers, warehousemen, salesmen and secretaries, all the full-time employees, are becoming capitalists under an Employee Stock Ownership Plan (ESOP) formulated by Kurland.
As of the end of Allied's fiscal year, Sept. 30, each full-time employe owns stock in the company amounting to 25 per cent of his or her earnings during the year, and will get a profit-sharing stock bonus amounting to at least 10 per cent of the wages each year.
Over the next 10 years, ownership of the plywood distribution firm will be acquired by an ESOP trust fund for the employees. When Sanders and his wife, the founders and principle stockholders, are ready to retire, the long-time workers will own the company and Mr. and Mrs. Sanders will have realized their capital gains.
Kurland, who touts ESOP as vigorously as others sell soap or salvation, claims the concept is not only a major innovation in employee benefits, but also a fundamental improvement in the private enterprise system. ESOP, he argues, turns "eage slaves" into coupon-clipping capitalists.
Employee stock plans also provide a new method of capital formation, allowing companies to repay debt with pretax dollars and, in the case of Allied Plywood, provide a method for a business owner to sell out without selling his employes down the river.
Sanders, who founded Allied and built it into a major independent plywood distributer, was motivated to consider an ESOP after an earlier attempt to take some of his capital out of the company.
He sold a few shares of the greatly appreciated stock in the very closely held corporation back to the company, only to discover that such a sale does not qualify as a capital gain. If a corporation's founder or his immediate family own more than half the outstanding shares in the company, the income from sale of stock back to the corporation is considered a dividend, the Internal Revenue Service told Sanders when it claimed a whopping chunk of his money.
The only way to realize the appreciation on his investment in the business appeared to be ti sell the stock outside, in effect forcing him ro merge with or be acquired by a competitor. That Sanders said, would leave the employees who helped him build the company at the mercy of a new owner.
A conventional sale of the staff seemed impossible because of the difficulty of the workers in obtaining financing to buy the business.
Sanders said he first learned of ESOP when he read a letter to the editor in The Washington Post from Kurland defending ESOP; a phone call to Kurland got the ball rolling.
kurland is the nation's leading proponent of employee ownership of business, a concept first promulgated by San Francisco financier-philosopher Louis Kelso. He helped put together the prototype for such plans when 500 workers at ths South Bend (Ind.) Lathe Co. bought the company to keep it from closing; that was three years ago and the company today is oparation profitably.
Major users of ESOPs in the Washington area include E Systems, Inc., a Texas-based defense contracter with offices in Northern Virginia and Lowe's, the lumber yard chain.
Basically, Employee Stock Ownership Plans work this way:
An ESOP trust fund is set up, finaced with contributions from the company, like profit sharing or any other employee benefit. Contributions to the ESOp are tax deductible for the company and are limited by the IRS to 25 per cent of the eligible employees' salaries, or $25,000 a person, whichever is smaller.
Rather than investing the employee benefits monies in securities as most corporate pension funds do, the ESOP trust uses its funds to buy stock in the company. The ESOP trust can purchase stock from public owners via a tender offer - a complex and rarely used method, from principal owners like Mr. Mrs. Sanders, or from the corporation's authorized but unissues shares - wich is also being done at Allied Plywood.
The ESOP trust fund can acquire all or part of the funding corporation's shares. It can buy the shares gradually - over a 10-year period at Allied Plywood - or can borrow money to acquire a block of shares all at once. That is called a "leveraged ESOP."
As with other forms of profit sharing, ESOps generally have vesting restrictions. Most of them also limit the employees' options in disposing of the shares acquired through the plan, giving the ESOP trust a right of first refusal on any sale and requiring the trust to buy any shares offered if there are no other buyers.
Most of the legislation creating ESOPs has been shepher ded through Congress by Sen. Russell Long (D-La.), a convert to Kurland's covering ESOPs gives corporations which set them up an added 1.5 per cent investment tax credit for doing so.
That provision has led to establishment to get their corporation the investment tax credit and provide additional corporate financing, rather than give employees a significant stake in the business, Kurland points out.
ESOPs also have come to be indentified with bail-outs of troubled companies; more than one conglomerate has disposed of marginally profitable and unmarketable division by selling it to its employees. That's not the primary purpose, Kurland stresses. Although some ESOp advocated, including Kelso who invented the idea, oppose ESOP purchase of troubled companies, Kurland does not object. "If you have a good tool, it ought to be used for solving problems," he says.
He opposes using ESOp techniques to allow the management of a company to buy it, usually wit government-subsidized loans. The recent purchase of American Safety Razor Co. in Staunton, Va., by a dozen of its top officers with federally financed low interest loans is a case in point. A true ESOP would have allowed all the American Safety Razor employees to benefit from owing their employer.
From this capitalist-reformer point of view, kurland argues that the role of profits in a capitalist system would be better understood if more people got them. He contends employee-owned companies ought to pay regular dividends, so profits would be as important as wages to the employee owners.
Linking profits and productivity through employee ownship minimizes labor problems by putting labor and management on the same side, he contends. "I don't know of any strikes in companies that have ESOPs," he says, though many employee-owned firms have unions and ESOPs can be a bargainable issue.
Kurland stresses repeatedly that employee ownership and employee management are not the same thing. It takes a strong, independent board of directors and professional management to run an employee-owned company, he said, criticizing Scandanavian and German efforts to put union members on board of directors as a conflict of interest.
In a small wmployee-owned company like Alleid Plywood, developing a new management team to take over when the original owners leave is the toughest problem, Kurland acknowledged.