Value is a word with many meanings. It can be used to describe a great buy or the relative utility of something. It can also be used to express the significance of an ideal. Value, of course, is also used to state the monetary worth of something such as a retirement account. ESOP participants receive an annual statement to learn the value of their account, but do they understand how they can influence this value?
Communicating value can be about more than just announcing a dollar amount per share; it can also be an opportunity to articulate the value of employee ownership and develop employee owners into ESOP Champions. Employees have a sincere desire to know the metrics affecting value and, as many successful ESOP companies have learned, fostering the connection between what drives value and how individuals affect that value is a hallmark of employee ownership. Whether value is discussed at a conceptual level or presented with full financial information, there are several important concepts to communicate.
There are many ways to effectively present value and cultivate employee ownership. Value can be communicated in small group meetings where specific concepts are covered or company-wide meetings in which financial results are presented and tied to the conclusion of value. Factors to consider when determining how to present value include employee sophistication, management’s comfort level in disclosing financial or sensitive business information, and organizational culture.
There are also circumstances where one group of employees receives more information than others. Regardless of the detail provided, there are certain core concepts to be communicated:
- The financial advisor is independent.
- There are different approaches used to determine value.
- Value is influenced by a range of internal and external factors. Many of these factors are beyond the control of the company or its employees.
- Each employee can impact value.
Independence of Financial Advisor
A key initial message to communicate to participants is the Trustee and/or ESOP Administrative Committee determines the value of the ESOP’s interest in the company with the assistance of an independent financial advisor. The financial advisor is independent of the Board of Directors, company officers and employees, and any non-ESOP shareholders. Explaining the advisor’s position relative to the other parties conveys the legitimacy of the process and conclusion and dispels the perception that value is set or influenced by management.
Ways to Look at Value
Central to any discussion of value is understanding there are many ways to value a company and that each valuation is unique to the company and the period in which it is appraised. However, there are three fundamental methods used by financial advisors: the Asset Approach, the Market Approach, and the Income Approach. Depending on the sophistication of the employees or specific groups of employees, as well as the desire of management, communication may range from an overview of the three approaches to a more detailed discussion of the specific methodologies utilized for this particular valuation.
In developing a conclusion of value, the financial advisor will assess whether or not there are internal factors that positively or negatively affect value. Generally, a company has a great deal of control over these factors. While an individual employee may not be in a position to control a particular internal risk factor, it is important that employees are aware of these issues and assist management in developing solutions, if appropriate. Common internal risk factors include:
- founder or key person transition planning;
- sales concentration;
- cost of sales concentration;
- the company’s ability to attract and retain qualified personnel;
- concentration of “business knowledge” in one or a few people;
- ability of key people to respond to business challenges; and
- adequate facilities to support growth.
Similar to internal risk factors, there are a number of external risk factors that impact value. However, these factors are often outside the control of the company or individual employees. Some of these include:
- the interest rate environment;
- stock market movement;
- legal and regulatory changes;
- economic conditions and outlook; and
- demographic, market, and industry changes.
How Employees Can Impact Value
Communicating value will be more effective if it includes specific examples of how an employee can impact the company’s earnings and cash flows – the key elements driving value. The first action is to identify elements critical to a company’s success. These might include gross margin, customer service, quality control, or sales growth. Emphasizing these elements during value discussion will encourage action at all levels to improve or strengthen results. Some examples of specific actions individual employees can take include:
- reducing scrap;
- minimizing overtime;
- performing work accurately and efficiently;
- suggesting better ways of doing their job; and
- minimizing supply or time waste.
Communicating Value: The Big Picture
Several studies have shown ESOP participants receive 2.5 times the retirement assets of non-ESOP participants, on average. While increased profitability and improved operational efficiency will normally result in stock value growth, effective communication and understanding of value is also a key component of a successful ESOP company.