How an Employee Stock Ownership Plan Can Destroy Your Company

An article recently appeared in Canvas Magazine titled, “How an Employee Stock Ownership Plan can be good for you and your employees.” See page 4. After reading this article, I felt compelled to write an alternative perspective.

In 1998 when I joined the company, Creative Memories heralded the Employee Stock Ownership plan (ESOP) as a good thing. After all, it gave me and other employees ownership in our future. We were Employee-Owners. Every year the company published annual compensation statements highlighting the value of employees ESOP accounts and promoting the ESOP account as part of the total compensation package.

Unfortunately the stock ownership plan transferred risk to the employees without giving them a real say in the future of the company. This risk came about because their was nothing to prevent the company from borrowing money, turning an otherwise debt-free company into a highly-leveraged house of cards, and debt equals risk. Once employees perceive risk, many leave, compounding the debt problem as the company must borrow to satisfy their ESOP obligations.

The banks, who are at the top of the pecking order when financial trouble comes, have little reason not to force the company into bankruptcy. After all, once the company is in bankruptcy, the banks can then take over and extract whatever value remains, leaving little for the future.

There you have it – how an employee stock ownership plan can destroy your company.

Note: See What is a Leveraged ESOP? and Employee stock ownership plan for more information on ESOP plans. The actual details are complex and I have simplified the process for this explanation.

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