Employee stock programs rare in state
CHARLESTON, W.Va. -- Employee Stock Ownership Plans are a rare form of business ownership in West Virginia.
The state had 38,676 businesses with paid employees in 2010, according to the U.S. Census Bureau. But the state had only 27 ESOPs in 2009, the most recent year for which data is available, according to a U.S. Department of Labor study.
The most famous ESOP in West Virginia was at Weirton Steel. That saga began in 1982 when National Steel announced it would stop investing capital in its Weirton division. As Time magazine reported at the time, "Weirton employees feared that management would drastically shrink the operation or shut it down altogether."
Weirton Steel's 6,000 employees voted to form an ESOP to protect their jobs. It was the largest ESOP in the United States. But the steel industry — and Weirton Steel — declined during the 1990s as foreign competition intensified. The Weirton Steel ESOP eventually failed and the company fell into bankruptcy. What's left — a tin mill — now employs about 1,000 people. ArcelorMittal owns it.
Tina McPhail, chief financial officer at Triad Engineering In. in Scott Depot, said of the Weirton Steel saga: "ESOPs are not designed to save a failing business. They're designed to perpetuate thriving businesses and keep businesses local. It's improper to expect a structure to save a failing business model. That's what happened with Weirton."
Triad is an engineering firm established by three West Virginia University professors in 1975. When the founders wanted to divest and retire in 1996, an ESOP was formed. Triad is now 100 percent owned by its 172 employees.
McPhail, who has been with Triad for eight years, is an outspoken advocate of ESOPs. She thinks the form of ownership has three advantages:
— "You work with and for your co-workers. So everybody has a vested interest. If the company is prosperous, the employees are wealthier. It creates a team that tries to put the company first in decision-making."
— "It benefits the client because the employees are out there as employee-owners. They know the profits come back to them."
— "Employees retire with an equity interest in a company whereas they otherwise may not have had an entrepreneurial opportunity. From the public perspective, they're not as dependent on public programs like Social Security."
An employee is eligible to participate in the Triad ESOP after they've worked there a year. "Each year the company sets aside a portion of the profit to invest in the ESOP trust," McPhail said. "All employees get a share of the profit in the form of Triad stock allocated to their account.
"The company can pre-fund the ESOP to make sure there's adequate cash flow in future years," she said. "We had one year, during the recession, when the stock value went down slightly. All other years, the stock value has increased."
McPhail said that when the recession hit the construction industry particularly hard, "our operations in West Virginia kept humming along." That was partly due to the fact the recession didn't hit West Virginia as hard as some other states.
Nevertheless, "In our eastern offices on Interstate 81, we said, 'We have to change our model.' We moved offices, consolidated departments. We felt we could take the challenge to the employees vs. laying people off and closing up shop. In that market, a lot of civil design firms shut down. We did not shut down a single office during the recession."
At Triad, "An independent appraiser values the stock every year, as if the company were going to be sold, thereby valuing the employees' accounts," McPhail said. "Every year the employees get a stock certificate — it's actually a trust certificate. It tells them their share.
"It's like a bank statement," she said. "It talks about earnings, contributions, and shows the current balance. We do practice open book management — we publish our metrics. We don't share people's salaries but publish our financial performance to our employees."
Triad has a management committee, elected by the employees, which contributes to management decisions. "We also have a board of directors," she said. "So we have two governing bodies." In addition, Triad has a chief executive officer to lead the company.
When an employee leaves Triad, they can no longer own stock. "You basically sell your allocation back to the trust," McPhail said. "The year after you retire, your money is moved to a money-market account. After five years you can roll it over or take it as a distribution. So you're paid out for your life's work at Triad."
If a business owner wants to retire or otherwise exit the enterprise, an ESOP can keep the business in the state by providing an alternative to a sale, McPhail said. Out-of-state companies that buy a business can move some operations and, perhaps, the entire enterprise. "We feel it (the ESOP structure) is a business retention tool," she said.
On a day-to-day basis, McPhail said the ESOP structure breaks down the union vs. management way of thinking.
Also, "it's an education opportunity," she said. Some employees don't have college degrees but they understand how to read Triad's income statement.
"I have folks come into my office and ask, 'If we buy this piece of equipment, how will the expense get recorded?' You just don't get that in other companies. It's a fantastic tool for relating cause and effect."
McPhail said, "When an employee-owner asks, 'What is the one thing I can do best that contributes to the profit of the company,' we're able to tell them that."
As an ESOP matures, "it transforms from a transition to an ownership style," she said. "I think that's where you really start to see the beauty of the plan — where it brings people together."