Jeff Heck had a problem. His company, ATEC Steel, a steel fabricator of storage tanks and other structures, had grown exponentially since he opened the doors in 2006. Maintaining this growth required that his major customers would come back anytime when they needed a steel fabrication, such as an above-ground storage facility.
To find and retain these customers, however, Heck had to have highly trained employees—and keep them happy. Losing a key employee brought the possibility of losing key customers, so replacing a highly skilled employee, like a project manager, in a tight labor market took on even greater urgency for Heck and ATEC Steel.
A successful and growing company in a niche market—was this the proverbial “embarrassment of riches”? Not to Heck. He knew long-term success hinged on finding the best talent available and developing that talent for ATEC Steel to maintain its position in the marketplace. But how could he keep them around? A new benefit package and a bigger 401(k) match were viable options, but they weren’t going to be enough to make Heck’s top talent stay put.
The Right Incentive
On April 24, ATEC Steel announced that it would become a 100 percent employee-owned company through the adoption of an employee stock ownership plan (ESOP). This, Heck recalls, was a no-brainer for his unique set of challenges. The ESOP could solve the retention problem (and attract good new people), and tax-wise it was a very beneficial way to accomplish business transition as Heck got older.
Heck’s intuition about ESOPs is well-supported by research. ESOP companies grow faster than they would have without an ESOP, have lower turnover rates, and are much less likely to lay people off or go bankrupt. In the largest and most significant study to date of the performance of ESOPs in closely held companies, completed in 2000, Douglas Kruse and Joseph Blasi of Rutgers University found that ESOPs increase sales, employment, and sales per employee by 2.3 to 2.4 percent per year over what would have been expected without an ESOP.
ESOPs are good for business, but they also are good for owners selling to an ESOP. Fabricating business owners looking to retire could sell to another company or a private investment group, but either approach could leave the future of their employees and their company in doubt. Selling to an ESOP, by contrast, keeps the company in place, rewards the people who helped build it, provides the owner flexibility in how much to sell when and what role to play going forward, and nets substantial tax benefits. It’s all done with future, tax-deductible profits, not employee purchases.