This article by Jennie Msall first appeared in The ESOP Association's April 2023 ESOP Report.
An ESOP can connect employee actions with company success, but that doesn’t automatically result in employee-owners taking responsibility for the success of the company. Sharing financial information is a critical first step to provide employee-owners with an understanding of how the business is doing. In addition, it’s essential to build people’s financial literacy and create systems for participation that empower employee-owners to act on the financial information shared and positively impact company performance.
Share price is a critical piece of information that gets announced every year. However, it shouldn’t be the only financial information shared with employee-owners because it comes too late to do anything about. Employee-owners need to be given information regularly about their units’ performance and the company’s performance in a time frame for them to act on the information. The more employee-owners receive real-time feedback, the more they will be able to link their actions with performance results.
Unfortunately, it’s not enough to just share this financial information, as some companies have learned. One company passed out monthly financial statements, only to see them tossed in the trash bin later. Another company regularly emailed a sophisticated dashboard, only to realize most employee-owners couldn’t make sense of it.
These examples demonstrate that more is needed to motivate employee-owners to take responsibility for the financial success of the company. To create a culture where employee-owners truly step into the role of business owners, it is necessary to build their financial literacy and create systems for participation.
1. Company financial profitability goals, including net sales, gross margin, and overall profitability metrics, such as net margin or EBITDA margin.
2. Goals for key business unit metrics that impact profitability goals, such as production units, on time delivery rate, scrap, or number of positive customer reviews.
3. Company progress on its goals in the form of company dashboards or reports, company meetings, or a departmental review of regular financial statements.
4. Business unit progress on its goals in the form of business unit dashboards or reports or financial reviews at team meetings.
5. Numbers that identify opportunities for improvement such as total scrap, rework due to quality flaws, or accounts receivable that are over 90 days.
Building financial literacy requires training employee-owners in how the company works and how that translates to the finances. They need to understand how the company makes or loses money, how money is spent, and what happens with whatever money is left. They also need to understand how to read and understand the numbers in company reports that are shared. This builds awareness of the expenses the company incurs and the potential uses of profits. Another piece of this education is for employee owners to understand which numbers they can impact, and which they can’t, and how their actions impact company profitability. It’s an investment of time and resources to provide this type of training to all employee-owners. That investment can pay dividends when employee-owners come up with cost-saving ideas for the company or make suggestions to improve processes or get things done more efficiently.
As an example, after one company invested in financial literacy training, one of their employee-owners better understood how inefficiencies in the production process added costs and reduced profitability. That employee-owner ended up making improvements to a production process that reduced the process time and resulted in a cost savings of $28,000/year.
Imagine if every employee-owner at one company came up with an idea that saved the company $28,000 a year every year! Once employee-owners have been educated about the business’ finances, it’s critical to sustain that learning by building systems that encourage employee-owners to act on the financial information shared. After investing in financial literacy training, many companies host a company-wide contest for company improvements, and the team of employee-owners with the idea that saves the company the most money wins. A one-time contest like this can be a great way to set the stage as you build towards more regular systems for engaging employee-owners in making business improvements, such as formal continuous improvement programs.
To fully engage employee-owners in the financial success of the company, engagement needs to be a responsibility of every manager. Each manager should regularly share and report out on business unit metrics in individual check-ins or regular team meetings, along with asking for ideas for improvement in any specific numbers.
Importantly, some managers may not want to ask employee-owners for their ideas because they’re anxious about having to respond to “bad ideas” or that the work of implementing ideas will fall on their plates. This can be addressed by developing managers’ leadership skills. With the right skills in communication, coaching team members, delegation, and accountability, managers can effectively support their team to collaboratively identify and implement actionable ideas.
While an ESOP does not automatically result in changes to employee-owners’ efforts and company performance, we know that when an ESOP persistently engages their employee-owners as shared business owners these shifts in effort and performance happen. By sharing financial information and empowering your employee-owners with the knowledge, skills, opportunities, and support to act on that financial information, you can start to create those shifts at your company.
