Susan Torroella is the CEO of Columbia MedCom Group, a Columbia, Md.-based medical communications firm. She recently oversaw the implementation of an employee stock ownership plan at her company. In this interview, she discusses the benefits of an ESOP and the keys to successfully establishing employee ownership.
Columbia MedCom recently instituted an employee stock ownership plan. How do these plans generally work? How do you determine each person’s share, and how long does someone have to be with the company to be eligible?
The IRS actually has a lot of preset formulas and shares are generally allocated in accordance with the employees’ compensation. Everyone gets shares, but the amount is derived by a formula that looks at the individual’s compensation relative to that of the entire personnel. The good news for employees is that the CEO can’t say they like an employee better or their role is more important than this role. It’s really preset.
There are some aspects of an ESOP that can be customized. For example, the vesting schedule. We chose a six-year vesting schedule. One of the first questions we faced when we began discussing this was whether we wanted to honor years of service prior to the ESOP. For example, if someone’s been here for six years prior to the ESOP, are they already 100 percent vested? We chose to say yes, because we wanted to honor the contributions of the employees who helped make the buy out possible.
What caused the organization to institute the ESOP?
The IRS created ESOPs and the tax benefits that come with doing an ESOP to promote the peaceful transition of ownership from an entrepreneur to the next generation. In our case, the two founders and majority owners – I was a minority owner – had retired and wanted to liquidate their assets. Their preference and mine was to maintain this company’s culture and independence. Had this company been put on the market, it would have most likely been purchased by a large multi-conglomerate out of New York. In the space that we operate, we know who the likely buyers would be. The ESOP was a means to buy the majority owners out and maintain our independence and our culture and improve upon the culture by making every single employee an owner.
How long has this move been in the works? How long has it been since the previous owners started talking about selling?
It took a year from the first conversation to the closing.
What did you have to do in order to prepare for the ESOP?
We actually called up other CEOs and CFOs from employee-owned companies. We interviewed them and asked them many questions. We had a whole list of questions, but the best one was: “What do you wish you had known now that you didn’t know two years ago?” That helped us. Interestingly, they said not to underestimate the roll-out to your employees, and they gave a lot of concrete advice. For example, bring in an outside expert at your roll-out meeting to explain many of the details. Video tape your meeting for any employees who are hired afterwards, so that they can see all the information that was rolled-out in the beginning. We took that advice to heart and our roll-out meeting was really fabulous.
What other kinds of things did you learn from these other companies that have had an ESOP in terms of making it work long-term?
The importance of communication. What I really learned was not to expect life to change overnight. This is something that you really need to work at on an ongoing basis. For example, the word choices you use. Now every email that goes out is addressed to employee-owners. We have a monthly “Learn and Lunch” meeting where the company comes together to discuss and share information. We’re just changing its name to the “Monthly Employee-Owners Meeting.” We have an ESOP Communications Committee made up of people from all over the company that deals with these issues.
ESOPs require a level of financial sophistication among the staff. Did you provide your employees with some financial training prior to the ESOP or is this something that you’re currently doing?
A lot of companies do train their employees on financial matters when they institute an ESOP. In our case, we already reviewed revenue goals, operating goals, year-to-date revenue and expense, and operating income at our monthly Learn and Lunch meetings. I actually think this was one of the components which helped with winning the Best Bosses award last year. I do think though we probably will do a little bit more training in this area, but we’re farther ahead than most firms. We’ve been practicing being an owner for a long time. We’ve had training wheels on for at least the last five years, if not longer.
How do you feel this move will impact your clients?
The feedback from our clients thus far has been tremendous. They feel that they now know that every single person that touches their business truly cares like an owner would care. Our people are truly invested in the business, and that gives our clients a sense of confidence.
There are very, very few independent firms like ours left. What I mean by that is that all of our competitors are part of larger multi-billion-dollar conglomerates. Our clients have shared with us that when firms get acquired, the quality and everything changes. That’s not the case with us. Our clients know that what they’ve come to respect about us is here to stay. That is a big win.
What advice do you have for businesses considering an ESOP?
One of the things that we’re fortunate about is the state of Maryland makes it easier for professional services firms to set up an ESOP. If you are a company that does not have fixed assets, like machinery or real estate, you can’t just march down to a bank and pull off an ESOP. Most professional services firms do not have those kinds of fixed assets. There are only a few states, Maryland being one of them, that want to promote employee ownership. Maryland wants companies to remain in-state and not be sold to outsiders, so they partially guaranteed our loan. I would encourage readers to see what program their state has and tell them about Maryland’s program. Perhaps it will encourage their local governments to do something, because most states want to preserve business in their areas. Also, do the research; talk to other employee owners and engage an expert. There are experts out there, so you don’t have to do this alone. Above all, I would say, go for it. I think it’s a wonderful, wonderful way to transfer ownership to the next generation.