Industry Trends: What Is an ESOP and How Does RJN Being an ESOP Company Benefit Our Clients?

This month (October) is Employee Ownership Month. As an Employee Stock Ownership Plan (ESOP) company, RJN Group, Inc. has been celebrating this special month since we became an ESOP company in 1995. We are proud employee owners, and we know that our ESOP makes us a better company, well-suited to serve our clients’ best interests. Here’s why:2016-esop-month-poster

  • Employee-owned firms are more successful. Due to this, RJN engineers and technicians bring an enthusiasm and energy to client projects that enable better communication and an optimistic, determined outlook.
  • Employee-owned firms are more creative, motivated, and productive. As a result, our clients know we will meet deadlines, exceed expectations, and develop novel solutions that are both cost-effective and successful.
  • Employee-owned firms have lower turnover. This strengthens a client’s familiarity with the RJN team, which helps establish positive long-term partnerships. In getting involved with such partnerships, RJN and its clients are capable of great things together.
  • Our employee owners have a vested interest in the long-term success of our projects. As employee owners, RJN’s team is fully invested in the outcomes of all our clients’ projects—to us, a project’s success is as much a professional responsibility as it is a personal achievement.
  • Our employee owners share pride in ownership of the firm, the reputation of the firm, and its projects. This pride ensures accountability. It also helps us provide our clients with the highest quality of services possible because everything we do for you is a reflection of us. There is no disconnection between what the company wants and what the employee wants. This allows for a “One RJN” approach because all of our employee owners are better united in one goal: the success of our clients’ projects.

Here’s How an ESOP Works

  1. Business owners sell their shares of the company to an ESOP trust
  2. Often the company takes out a loan and loans the funds back to the ESOP trust. The company then takes profits and makes contributions to the trust regularly, which the trust uses to repay the loan.
  3. Once the loan is repaid, shares are made available to allocate to employee accounts
  4. The company manages the ESOP according to IRS and ERISA regulations, which set forth guidelines for contributions, allocations, vesting, distributions, diversification, and other aspects of the ESOP

DID YOU KNOW?

  • ESOP companies are 25% more likely to stay in business
  • Employee owners are usually less likely to be laid off, as evidenced by statistics during the recent recession (employee owners were 4x less likely to be laid off)
  • Employee ownership builds wealth—for the company, for the employee owners, and even for the community
  • ESOPs are great for business—there is improved productivity, higher job growth, and increased sales in ESOP companies

Timeline of ESOP Creation

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1956

Peninsula Newspapers establishes the first ESOP.  The ESOP was originally called the “second income plan”.

Number of ESOPs: 1

Number of ESOP Participants: Under 200

 1974

Congress passes legal framework for ESOPs called the Employee Retirement Income Security Act (ERISA).

Number of ESOPs: 200

Number of ESOP Participants: 250,000

1977

The term “ESOP” is coined.

1995

RJN’s ESOP began when the company founder, Richard Nogaj, sold his ownership in RJN Group to the employees as an ESOP transaction.

1996

Congress passes legislation allowing ESOPs to own S corporations. This encourages and expands retirement savings by giving millions more American workers the opportunity to have equity in the companies where they work.

Number of ESOPs: 6,680

Number of ESOP Participants: 5.3 million

2014 – Present

The number of ESOPs and ESOP participants continues to grow.

Number of ESOPs: 6,941 and growing

Number of ESOP Participants: 13.5 million and growing

Glossary of Terms Related to ESOP

Click here to read the entire glossary

Allocation: An amount or portion of a resource assigned to a particular recipient. The ESOP trust allocates shares in the company to employee accounts. An employee owner’s allocation is based on their eligible gross wages as a percentage of total gross ESOP-eligible wages. Annual allocations can come from forfeitures, repurchased shares from former employees, retirements, diversification, and company profits.

Appraisal: An act of assessing the value of something. A third-party assessor appraises the ESOP company annually, determining company share value.

Contribution: A payment to a common fund or collection. An ESOP trust makes contributions to each employee account every year, using profits and repurchased stock to fund the contributions.

Distribution: Payments made from an ESOP once the employee is no longer with the company, be it due to retirement, termination, death, or disability. Distributions can be made in a lump sum or regularly at equal payments.

Diversification: The act of varying an account’s composition. ESOP participants may diversify up to 25% of their company stock for five years after reaching age 55 and participating in the plan for at least 10 years. During their sixth year of diversification, they are permitted to diversify up to 50% total of their account minus any previously diversified shares.

Forfeiture: The loss or giving up of something as a penalty. If a former ESOP participant is not 100% vested in their ESOP account balance, they will forfeit their nonvested account balance upon taking part in a forfeiture event, such as termination. Balances recouped from forfeitures are reallocated in the ESOP to its remaining participants.

Profit: A company’s financial gain; the difference between the amount a company earns and the amount spent to run the business. A percentage of profits are often allocated in the ESOP to its participants every year.

Repurchase: The act of buying back shares of an ESOP. Once an employee retires or otherwise leaves the company, that company is required to repurchase that employee’s vested shares in the company at fair market value and reallocate them in the ESOP to its remaining participants.

Shares: The number of parts of a stock in a company that an investor owns.

Stock: Represented by stock certificates bought by an investor, these are pieces of paper that denote ownership of a company. Stock is sold in shares. ESOPs allow employees to own stock in the company (part of the company), usually without the employee spending anything.

Value: The total financial worth of something, measured in dollars. ESOP companies are appraised to determine the total value of the company and the company share value.

Vesting: The conveying to an employee of unconditional entitlement to a share in a fund. Vesting is the amount of time an employee must work before acquiring a nonforfeitable entitlement to his/her ESOP benefit. Companies must meet one of the following two vesting schedules: cliff vesting (there is no vesting in the first years and then there is a sudden 100% vesting after three years or less of service) and graded vesting (20% vesting after the second year of service with 20% more each year thereafter until 100% vesting occurs after the sixth year of service). A year of service is generally defined as 1,000 hours of service to the company.

Sources for This Article: The National Center for Employee Ownership, ESOP Partners, The ESOP Association, Oxford Pocket Dictionary of Current English, RJN Annual ESOP Update – 2016, RJN website