Because of the strong ties that Keen Wealth has established with metro Kansas City’s thriving engineering community, we’ve gained real appreciation for the power of employee stock ownership plans, or ESOPs. The Harvard Business Review study shows that companies that implement this unique structure dramatically improve their performance by empowering their workers to think and act like owners. ESOPs can also improve workforce retention, which is a boon for both young workers seeking career stability and companies that are battling for talent in a tight labor market.
On today’s show, I talk to three top executives from Henderson Engineers in Lenexa, KS about how they established their ESOP just over a year ago. No matter what industry you’re in, I think our conversation will help you understand how an ESOP works, some of the challenges around setting up an ESOP, and also the myriad of benefits for both the employee owners and clients of these firms.
Joining me are:
Kevin Lewis, CEO & President
Robin Broder, Chief Marketing Officer
“People, people, people, people, people.”
Since its founding in 1970, Henderson Engineers has grown to over 1,000 team members and more than $200 million in annual revenue. Kevin Lewis has worked just about every job in the company during his 18-year journey to CEO, so he has a very special appreciation for what makes Henderson so successful.
“I think the culture is what sets us apart,” he says. “Everyone asks me, ‘What are the top five things you guys have going on?’ It's easy: People, people, people, people, and people. We believe in relationships. Everybody that we have on staff has a passion for what they're doing. We also believe in our clients, and client experience is something that's going to take us forward.”
Experts will advise that a company needs to be consistently profitable and growing to make a successful ESOP transition. But as important as the money piece is, it’s this people-first approach that Kevin describes that leads many forward-thinking companies to ESOPs.
“Once we started learning about ESOPs and some of the benefits and the employee mindset, lightbulbs went off,” Kevin says. “We were like, ‘This is probably what we should have been all along.’ It really goes back to those fundamental values we've had as an organization over the past 52 years. We've always wanted to create a legacy firm. We believe so much in Henderson and the brand that we have. The ESOP really helps with that transition and that succession planning. So just from the cultural aspect it was a home run. It's a perfect fit and it's something that we really believe in.”
“We’re all in this together.”
A successful ESOP transition requires buy-in at every level of the organization, from management down to the new potential ownership group of employees. Engineers, of course, are a very detail-oriented group of professionals, so for Henderson the process started with clearing up some misconceptions about how ESOPs work.
Essentially, when a company converts to an ESOP, it borrows money to set up a trust fund and buy shares that are distributed to personnel under certain terms including a ratio to each employee’s income to the total payroll. If structured as an S-Corp, the company is no longer subject to federal income tax on U.S. earnings. Instead, it can use the money that would have gone towards federal taxes to pay down that initial loan and release more shares to current employees. An ESOP is considered a qualified retirement plan so participants don’t pay tax on the value of their shares until they take distributions in retirement, not unlike a traditional 401k or IRA. But unlike a traditional retirement account, workers don’t make contributions to the ESOP. It’s funded by the earnings of the company that are ideally continuing to grow and compound over time.
“One reservation was loss of control,” Dana says. “We had heard that sometimes when you bring in the trustee you're not running your company anymore. That is not the case at all. Also, we already had a profit-sharing plan in our 401(k), and there was a misconception that it's just like a profit-sharing plan. Why do you need to switch to an ESOP? There are actually significant differences, but the biggest one is that you're all-in on your own company's value and your stock. The power of building that value is a huge difference from a normal profit-sharing plan. Pretty much all the misconceptions were dispelled and we felt way more comfortable proceeding.”
Being people-first leaders, Kevin, Dana, and Robin wanted all of Henderson’s employees to feel comfortable with this transition as well. So they created a series of educational initiatives, including a peer group of “ESOP Champions” who can be a resource for workers who want an employee-level perspective on how ESOPs work.
“When we made the transition, we knew we had a lot of education ahead of us,” Robin says. “People get it in theory, but they don't understand the mechanics. As soon as we transitioned, we put together a series of videos of all different concepts of the ESOP and we added graphics that helped bring different things to life. We realized that the more people know about it, the more they'll get behind what we're doing. That's when the power of the ESOP comes through and everyone gets that we're all in this together.”
“Hey, I own this place now!”
One thing an ESOP isn’t is a path to instant riches. ESOPs reward employees who are committed to the company, and executives who are committed to making the company better. In his book on ESOPs, “Create Amazing,” Greg Graves, former president, CEO, and chairman of Kansas City's Burns & McDonnell, estimates that it takes two to three years for the bigger benefits of an ESOP to start manifesting. But Kevin is already seeing the galvanizing effect that Henderson’s ESOP is having on its new owners.
“I was walking down the hall one day and there were a couple pieces of trash on the floor,” he remembers, “and somebody stopped and picked it up and said, ‘Hey, I own this place now! I really want to take care of it!’ More substantially what we've seen is people start to really focus in and say, ‘What can I specifically do to help the company move forward? Can I provide a better client experience? Can I really listen to the innovative ideas that our clients have on leaning into sustainability? Can I have a better client relationship? What can I do to help you?’ I think we're starting to see that buy-in on a broader scale across the organization.”
As Kevin, Dana, and Robin point out, metro Kansas City is really “an ESOP town,” and they want to pay forward all the help and advice that they received on the way to their successful ESOP transition. If you’d like to learn more about ESOPs, get in touch with Henderson Engineers and someone from their team will point you in the right direction.
In that same spirit, if you want to understand how your ESOP fits into your personal plan for retirement and ultimately to evaluate that you are on track and maximizing your resources - email me at firstname.lastname@example.org and I’ll send you a complimentary personalized copy of my bestselling book, Keen on Retirement: Engineering The Second Half Of Your Life.
And, better yet, give us a call or email us to take advantage of our complimentary in-person or Zoom introductory session and experience our process for “engineering the second half”!
Bill Keen is a financial advisor with nearly 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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