This Q&A between Armando from CECP with Tiffany from Pariveda explains how Employee Stock Ownership Plans (ESOP) support employee engagement.
What are ESOPs?
An ESOP is an employee benefit model enabling employees to own part, or all, of the company they work for. ESOPs can boost productivity, employee retention, and job satisfaction, while offering tax advantages for the company and keeping jobs local, which can contribute to long term business success. This model incentivizes employees to contribute to the company’s overall growth by offering them a stake in the financial outcomes.
ESOPs Are a Catalyst for Inclusive Wealth Building and Employee Engagement
At CECP, we are the only business counsel and network dedicated to driving measurable returns on purpose. One of the reasons why we promote responsible purpose-driven business is because it builds employee engagement and increases job satisfaction, which according to Deloitte’s 2024 Gen Z & Millennial Survey is a critical element to 86% of this rising cohort of employees.
ESOPs serve as a unique opportunity for a company to reinforce their commitment to employee engagement as well as their Diversity, Equity, and Inclusion (DEI) efforts. By democratizing company ownership and extending wealth-building opportunities across all levels of an organization, ESOPs help mitigate income inequality and create a more inclusive corporate culture. This, in turn, drives higher employee engagement and loyalty because they can feel a deeper connection to their work and personal ownership for the company’s success.
A Short Case Study: Pariveda
To better understand the impact of ESOPs on DEI and Employee Engagement, Pariveda provides an excellent case study for exploring how ESOPs can transform a company’s culture and drive a return on purpose. We sat down with Tiffany Lentz, the Director of Social Impact for Pariveda, and Mark Brennan, their in-house ESOP expert, to hear more about how being an ESOP supports their mission and long-term success.
- As the Social Impact Lead for your company, how has being an ESOP supported the company’s approach to DEI initiatives?
One of the primary reasons our founder started our company was to leave a meaningful impact in his community and in the world. Set with the mission to develop people to their highest potential, he believed doing so in the context of a business would offer employees a sense of purpose in their work, ensure financial stability, and give them an opportunity to build generational wealth.
The decision to become an ESOP was an easy one because it was clear that it would offer employees across all levels the opportunity to build a financial legacy that perhaps their parents and grandparents never had the opportunity to do. But this type of impact does require intentionally inclusive hiring practices and because diversity was always something we championed, we have been able to build a diverse company with employees who are actively participating — through their good job performance and the company’s subsequent success — in changing the financial story for their family.
- Tiffany, your colleague Mark Brennan has experience with the financial and operational side of ESOPs, and the practical implementation of the benefit plan, how has he explained the unique strategies Pariveda has employed to ensure widespread participation in the ESOP with all employees?
A big part of what makes ESOPs unique is that they are required to offer broad-based employee ownership across all levels because they are subject to the same IRS nondiscrimination rules as a 401(k) plan. This was a big differentiator for us in choosing an ESOP structure relative to co-ops, stock option plans, or stock purchase plans, which tend to be less inclusive.
In the design of our plan document, we specifically elected the most open rules on participation eligibility by not specifying an age requirement, or prior service requirement. This ensures that even our newest, youngest employees begin realizing the benefits, building equity in their work immediately.
Our fully transparent and equitable pay structure also facilitates a more meaningful and attractive ownership offering. ESOP shares are allocated based on relative compensation of each employee, so a top-heavy salary structure would lend itself to skew shares towards executives, leaving few shares for front-line or mid-level employees. Our CEO to median-paid employee ratio is approximately 4.5, so our ESOP share allocation follows a similar pattern.
With an annual valuation, employees can see the impact of their work expressed through a growing share price. This sense of genuine ownership of the business naturally increases enthusiasm for contributing to the company’s bottom line, as employees can see the value of those shares increase over time.
- And can you please share how the ESOP has affected employee engagement and retention?
As someone who previously worked at a private company that went public and saw first-hand the way that changed the company culture, joining an ESOP was an attractive selling point for me.
At Pariveda, the ESOP represents a key element of our overall company culture and exemplifies our mission to prioritize the needs and growth of our employees. Through our regular surveying to assess engagement & satisfaction, our employees consistently rate us above the benchmark norms for our industry, which is a reflection of our overall offerings. Our ESOP benefits solidify to our employees that the company is committed to their future and seeing them reach their highest potential in every aspect of life.
- How does the company ensure that employees understand the value and impact of their ownership?
We have found that the ESOP is difficult for people to grasp, partially because it’s not that common and partially because it is complicated. Our experience is the communications and education needs to be regular and address several distinct areas: the workings of the plan itself, how our private shares are valued, the economics of our firm, and financial literacy in general.
For us, this journey starts during the recruiting process and our talent acquisition team introduces our ESOP to prospective employees, as well as our week-long new hire onboarding training, which includes highlighting our ESOP.
Certain milestones in the plan year are natural communication opportunities: announcing our share price and explaining the independent appraiser’s methodology, celebrating the receipt of new shares when statements are published (supplemented with a “how to read my statement” guide).
Between these milestones we practice open-book management, regularly sharing and explaining our financial results, with roughly semi-annual townhalls to invite questions. Our finance team has also published on-demand financial literacy courses and occasionally are invited by business unit leaders to present at all-hands meetings.
Our overall goal is to impart how employee actions affect company value, which affects the value of the ESOP. The financial value of an ESOP can be hard for someone to envision; it feels distant, and nobody can truly predict the share value increase over time, so we have found it helpful to also share a couple of anonymized employees’ ESOP statements.
Ultimately, the ESOP may not be a benefit that is always at the top of our employees’ minds, but it certainly serves as a way for our company to authentically support a culture that prioritizes the development of our people and their long-term financial security.