The ABC’s of ESOP’s

There are many reasons a business may start an Employee Stock Ownership Plan (ESOP), including tax incentives, motivating employees to work more efficiently or as an alternative vehicle for corporate financing. But Frieda Takaki, president and CEO of the employee-owned CHART Rehabilitation of Hawaii, says she created the company's ESOP five years ago simply to share the wealth where the wealth was created.

"I'm a firm believer that if you take care of your people, your people will take care of the business," says Takaki, who, since becoming president of the Hawaii Chapter of The ESOP Association four years ago, has quadrupled membership and put on dozens of local conferences and workshops. This May, Takaki was awarded the national organization's Outstanding Board of Governors member for her tireless work as an ESOP advocate.

Photo: Jimmy Forrest

HB: How many ESOPs does the ESOP Association estimate there are in Hawaii?

A: The state of Hawaii has approximately 75 to 85 companies that are ESOPs.

HB: That sounds pretty low.

A: In comparison with the total number of Hawaii companies, yes. But for the small state that we are, it's not bad. Nationally, there are about 10 million employees covered under about 8,000 to 10,000 ESOP companies. So it's not as small as it seems, nor is it as big as we like it to be. But it's growing. Four years ago, when I took over as president, we had seven members in the local chapter. Today we have 31. When we had meetings, 15 people would come. Today we average 70 members at meetings. In the last year, there were about six new companies that became ESOPs. So it's getting bigger and bigger.

HB: Are there challenges unique to Hawaii when forming an ESOP?

A: The lack of available resources. For example, a few years ago, there were only three qualified attorneys in town who could do ESOPs. There were maybe one

or two people who could administrate ESOPs. Also, every year, ESOPs have to value their companies, but there was only one appraiser in town, now there are maybe two. So I'd say the professional resources were not readily available in Hawaii. To a large degree, that's still the case today, but, because more of the local professionals are getting involved and understanding ESOPs, there's a little more help available.

HB: How much does it cost a small business annually to provide its employees with an ESOP?

A: Well, nothing is free. I'd say for a small company, it could cost at least $10,000 to $15,000 a year. That's all primarily

professional fees. So while there's no minimum requirement, we recommend that an ESOP have no less than 15 employees to make it worth the cost.

HB: What are the benefits to the employer?

A: The tax incentive is the biggest incentive for companies to become ESOPs. If you're an S-Corp, you don't pay any income tax. But you're not only doing it for the tax benefits. I'm doing it because I really care how the staff is motivated. I really want to share the wealth. So if you came and told me I'm only interested in the tax incentive, I'd probably tell you don't become an ESOP. Because if that's all it is to you, you won't reap the benefits. They say don't worry about the profit, worry about the people. The people will make you the profits. And it's so true.

HB: Have there been any studies that determine whether employee ownership has any impact on productivity and profitability?

A: Oh, yes, there was a national study and it showed that a company that's an ESOP produced and was more effective than non-ESOP companies. I don't remember the exact numbers. (According to The ESOP Association, 75 percent of its members report an increase in productivity after becoming an ESOP.) If you suddenly became an owner, you're motivated to work harder. Nobody ever washes a rented car. But if you own a car, you take care of it.

HB: What is the most common reason businesses form ESOPs?

A: ESOPs can be a great financing vehicle, because now the assets are in this trust. So there's a lot of money between the stock value and the cash distribution in an ESOP - it could be millions. Why are you going to let it just sit there? It's a means to gain more capital investment. A lot of companies then take this as their assets and finance purchasing of a building. And then it benefits each of the ESOP participants, because they now become beneficial owners of another big asset.

HB: Any final comments?

A: I have to be honest, when you first become an ESOP, it's like, "Oh my god, what did I do?" There are so many laws and rules and things to do. But we're now going into our fifth year of being an ESOP and I can sit back and feel teary that that's the best thing I've ever done. Because it's a tremendous benefit to our people that lets them know we value them. It's not just lip service.