Sundog creates employee stock ownership plan
FARGO - A baseball set on each Sundog employee's desk last year hinted at the change. "Official owner," it read. Sundog, the Fargo-based marketing and technology company, announced last summer it was creating an employee stock ownership plan, or ...
FARGO – A baseball set on each Sundog employee’s desk last year hinted at the change.
“Official owner,” it read.
Sundog, the Fargo-based marketing and technology company, announced last summer it was creating an employee stock ownership plan, or ESOP.
An ESOP is a tax-qualified employee benefit plan in which employees are given shares of the company, making each employee a partial owner. The shares, which the employee is typically vested in over time, are held in trust and paid out when the employee retires or leaves the company.
According to the National Center for Employee Ownership, ESOPs were almost unknown until 1974. Now about 12,000 companies have ESOPs or similar trust-based plans, covering more than 11 million employees.
Several prominent area companies are employee-owned, including Scheels, Border States Electric and Bremer.
Sundog CEO Brent Teiken has heard ESOPs are becoming more popular, especially in our region.
“The idea of an ESOP and shared ownership aligns very well with the culture of business in the area and values of the Midwest,” Teiken said.
Companies often choose to create an ESOP as part of a succession plan, said Sue Crockett, executive director of the Minnesota/Dakotas Chapter of ESOP.
This may be especially true in rural areas.
For example, if a company’s founder is ready to retire and his or her children don’t want the business, selling it to the employees through an ESOP preserves the company’s legacy and the jobs.
Other reasons for creating an ESOP are companies wanting to give back to employees, or to take advantage or the plan’s tax benefits.
Crockett said ESOP companies weathered the U.S. recession better than non-ESOPs. The General Social Survey found 3 percent of employees who had stock ownership were laid off in 2009-10, compared to 12 percent of those without.
Employees with employee stock ownership were less likely to intend to leave their company than those without, according to the survey data.
ESOPs can be a good retention tool, said Jess Helvik, assistant vice president at Bremer Investment Management and Trust, which serves as a record keeper and/or trustee for ESOPs. They also provide diversification for the employee’s retirement portfolio, he said.
However, ESOPs can have pitfalls. If the business doesn’t set aside enough money to pay out the people who are leaving the company, it could go badly, Crockett said.
If the company is initially overvalued through a fiduciary error, the employee owners shares wouldn’t fare well, Helvik said.
Helvik said it can be an issue if owners go into an ESOP for the wrong reason, for example, wanting to sell but not lose control.
ESOPs are expensive to put in place and administer, as the company has to pay for an outside valuation and other professional services, she said.
Some companies may not see the benefit of the extra work and cost.
“You have to have the management buy in,” Crockett said. “They want to communicate; they want to keep the employees in the loop.”
Some employees, especially younger workers, may want their money now, instead of waiting to be vested in their shares, or see the value and number of shares potentially grow.
Crockett said when some companies hire, they seek employees who understand the employee-owned culture: that their performance affects the company’s bottom line, and their own profitability.
‘Next logical step’
Sundog officially announced its stock ownership plan at a midyear meeting July 30 at Newman Outdoor Field.
Teiken said an ESOP was the “next logical step” for the company, which places a strong emphasis on the company's team-based culture.
“They feel that direct tie to the overall company’s performance,” Teiken said.
Sundog’s ESOP took effect at the end of 2013, with 15 percent of the company’s stock being allocated to the ESOP.
“We wanted to start slow,” Teiken said, adding that a larger percentage of the company may become employee-owned in the future.
Teiken said Sundog, like any ESOP, has to make concerted efforts to communicate with employees, both before the transition to an ESOP, and afterward with open book management.
“If you want engaged team members, they have to trust you, and part of that trust is transparency, Teiken said.
Sundog, which has just over 100 employees, has been holding a series of lunch and learns to explain the ESOP’s ins and outs.
Teiken said he’s heard it takes on average three years for people to understand all that goes into an ESOP.
Larger tests may await. For example, if the company has a couple tough years and its valuation goes down, will employees rally together or question the benefit of being an employee-owner?
“That’s why it’s important to have a team-member culture to begin with,” Teiken said.