When an Employee Stock Ownership Plan Makes Sense

Even though the employment market is flooded with unemployed top talent, smart companies need to always be thinking about the most effective ways to retain their best employees.

Perhaps one of the most powerful employee engagement tools is an employee stock ownership plan (ESOP). “What greater way to motivate each and every [employee] than by giving them all a little piece of the pie,” says James Sinclair, the principal of OnSite Consulting, a nationwide consultant to the hospitality industry. An ESOP “motivates employees, improves firm performance, fosters innovation, and promotes sound financial health,” says Sinclair. Indeed, studies show that employee motivation and productivity increase in companies with ESOPs.

By definition, an ESOP is a qualified defined-contribution employee benefit plan that invests primarily in the stock of the employer company and allows employees to become partial owners of the business. In the United States, more than 11,000 companies — from Fortune 500 firms to small, private types — have implemented an ESOP. That translates to an estimated 8 million employees who own stock in their companies through an ESOP. And according to Gary Young, a corporate attorney and advisor to small businesses on ESOP issues, the appeal of ESOPs for employees goes beyond participation in company ownership. “Like a pilot in a plane, passengers take some comfort in the fact that the pilot will share in the same fate as they will,” he says.

But using ESOPs as an employee engagement tool is often not the primary motivator for most business owners. The real motivation? Tax advantages. “ESOPs give [business owners] the most tax-favored option that the tax code provides anyone,” says Young. An ESOP provides a tax-advantaged vehicle to create liquidity, and a ready market for company shares so that the owner can take some cash out of the business. One of the potential tax advantages is that an entrepreneur who sells company stock with favorable capital gains treatment can possibly defer recognition of that gain indefinitely or altogether, says Young.

There are two types of ESOPs: leveraged and non-leveraged. Companies can make tax-deductible cash contributions to the ESOP to purchase stock or have the ESOP borrow money to buy the shares. Under a leveraged ESOP, an ESOP obtains a loan from a bank, usually with a company guarantee. The ESOP then uses the loan proceeds to buy stock from the company and/or existing shareholders, says David Johnson, an attorney with Turner Padget Graham & Laney in Florence, South Carolina. The company makes annual tax-deductible contributions of cash to the ESOP, which in turn repays the bank. With a non-leveraged ESOP, the company makes annual contributions to the trust either in the form of stock or in cash that is then used to buy shareholder stock.

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Will Your Texting Policy Stand Up in Court?

By Minda Zetlin

A new Supreme Court case casts a shadow on employee text messaging rules. The case involves an employer sued for reading an employee’s (highly sexual) text messages, even though he sent and received them using company-owned equipment.

You have a mobile workforce, so you issue mobile devices to your employees. You pay for their mobile service and make sure their equipment is working. Since it’s intended for business, you have the right to read employees’ text messages. What’s more, you have a policy that says so, in so many words. All employees must acknowledge this policy when receiving their Blackberry devices or other smartphones.

Legally, you might think you’re well covered — and you might be wrong. In Ontario, Calif., police officials reviewed an unusually large number of texts sent by a police sergeant named Jeff Quon. They found hundreds of sexually explicit texts. Quon sued, arguing that his bosses had no right to read the texts. The case made its way up the food chain to the Ninth Circuit Court of Appeals, which ruled in favor of the cop. Recently, the U.S. Supreme Court agreed to hear the case, with a final ruling expected this summer.

Whatever the court eventually rules, this is unlikely to be the last employment case involving text messages, and employers find themselves setting text and other communications policies in an increasingly confusing world. “Technology is changing fast and the courts are left to catch up,” notes Jason C. Gavejian, an associate at Jackson Lewis LLP. “The biggest challenge is the interplay between federal law, and state and local law,” he adds. “In one New Jersey case, the courts ruled that employers have an obligation to make sure employees are not viewing child pornography. That requires monitoring. Now the Supreme Court may rule that monitoring is illegal.” If it does, the two rulings will be in direct conflict, and employers in New Jersey will have to choose between disobeying state and federal courts.

It should be clear by now that setting an appropriate policy governing the use of mobile devices is a very serious business. But many small companies don’t take it seriously enough, says Michael McAuliffe Miller, partner in the labor and employment group at Eckert Seamans Cherin & Mellott, LLC. “The biggest mistake companies make is that they have no policy on texting and mobile communications,” he says. “Or else, they have an off-the-shelf policy that they’ve downloaded from the Internet. Then they’re inconsistent about enforcing the policy, especially with employees everybody likes.”

Develop a policy on texting

If the above is a good description of how not to handle texting policy, what’s the right way to do it, especially in light of the Quon case? Unfortunately, there’s no one right way, but here are some steps that may help:

Have the right people create policy. “In many companies we consult, these policies are set by an IT person,” notes James Sinclair, principal of OnSite Consulting, a hospitality industry consulting firm that specializes in helping financially troubled companies regain profitability. “I’m a big believer that these should be management decisions.” Top management should set mobile communications policy, with input from legal counsel.

Update the policy often. Especially any time you provide employees with new types of devices. “One of the issues in the Quon case is that the police force’s policy had been written to apply to e-mail, not texts.”

Reduce expectation of privacy. “Employers should have a policy that says employees have ‘no reasonable expectation of privacy.’ That’s the key phrase,” Miller says. The policy should be distributed to employees at regular intervals, and they should be asked to acknowledge their agreement. “Some employers make that consent interactive,” he adds. “It could be part of the employee’s log-in process.”

Specify who can change policy — and who can’t. In the Quon case, the police force had a formal policy that said texts weren’t private. But a lieutenant told Quon informally that if he paid for any texts beyond the 25,000 characters a month on his pager plan, no one would read his texts. “You should have in your policy that no one but a designated senior official of the company can change the policy,” Miller says.

Train managers about the policy. “You want to make sure managers get proper training so that when they inform employees about the policy they’re doing it in a uniform fashion, consistent with what the company wants to accomplish,” Gavejian says.

Specify how equipment is to be used. This is a tricky question. You can’t define unauthorized use too narrowly, Gavejian says. For instance, if you write a rule against sexually explicit text messages, it won’t apply to sexually explicit images. Instead he suggests a rule that company equipment be used only for business communications. At the same time, he acknowledges, such a rule may not be realistic. “You can’t stop someone from sending a message home saying ‘I’ll be late for dinner,’” he notes. “I don’t think there’s one universal policy everyone can apply. It has to be analyzed on a case-by-case basis, and depending what technology you’re using.”

Keep messages on your own servers. This is a potentially costly solution that isn’t right for every small company. But, because its clients’ data is always highly confidential, OnSite Consulting chose to route all e-mails and Blackberry messages through its own servers. “We worked with our general counsel and did a lot of research,” Sinclair explains. “By default, if you’re going through our server, you’re accepting our terms and conditions, and the messages are automatically copied and audited.”

This solution may become more popular in the wake of the Quon case: One of the questions at issue is whether his employer had the right to demand his text messages from their pager company, and whether the pager company was right in acceding to that demand. OnSite’s server is hosted and maintained by a hosting provider, but it does physically belong to OnSite. “We made it a priority and spent a significant sum for a technology we can’t see or directly use and that does not contribute to our return on investment,” Sinclair says. “But it provides another layer of protection for our clients.” It also provides a real-world model of how to most safely handle employee communications. “We have to do it,” Sinclair says. “We can’t walk in there as a consulting company and have a less-than-perfect system ourselves.”

The next big ‘thing’ is more often than not an old fashioned and tried and tested ‘thing’ with a shiny new layer of gloss and some lessons learnt thrown in to the pot. The same applies in management and in my view, the coming business year will see a greater focus on employee incentivisation, specifically how giving executives and/or employees some sort of shares in a company can be the key to unlocking your business’s potential. What greater way to motivate each and every staff member than by giving them all a little piece of the pie?

Employees share option schemes (ESOPs), pension plans (such as the USA’s 401k) or Enterprise Management Incentive Schemes (UK) are common in publicly traded companies across the globe. Share price data is publicly available information and those shares are therefore tangible and easy to buy and sell. Equivalent schemes in private companies are less widespread however a practical program for the business with a notional trading platform and ‘shares’ for staff is certainly implementable.

The economic challenges we are all facing compound the view that current incentives are inappropriate and can lead to problems triggered by a lack of short, medium or long term accountability for corporate decision making. Bonuses are generated by short term deliverables which may not be in the best interest of the company and a logical replacement to this practice is a more long term, golden handcuff arrangement. Share schemes are a safe and fair way to motivate staff whilst ensuring their goals are entirely aligned with those of the whole company.

The USA has typically led the way for such private share schemes, typically known as phantom stock options or stock appreciation rights (SARs). One of the founding fathers of such practice was UPS, founded in 1907. Until its listing on the stock exchange in 1999, the company was broadly owned by non management, management and supervisory personnel – a practice established by Jim Casey in the 1920s when he gave staff the opportunity to purchase company shares. UPS regularly ran a stock purchasing program before the IPO where staff could trade shares. In January 1997 the price was set at $29.25 and by March 1999 it had risen to $47.

In November 1999, the Company offered 10% of its stock to the public for the first time and on the first day of trading, the stock closed at $67.25. Not only did employees benefit until 1999 with the phantom scheme but with the IPO, they had a second and larger windfall with an even more liquid platform on which they could trade their shares. Hard work and loyalty were repaid twice over.

Why should you offer shares to your staff? It motivates employees, improves firm performance, fosters innovation and promotes sound financial health. It promotes staff loyalty and attracts and retains a high caliber of staff who want to have a vested interest in their future. To give staff the status of part owner of a business is a very powerful motivator.

There is of course a cost in implementing such schemes because you will undoubtedly need advice from specialists. There are accounting and tax issues at play here and it is critical to ensure that the framework you build takes into account local tax issues, accounting implications for your balance sheet and other miscellaneous issues such as ensuring that you allocate enough stock to a trust so that future employees can benefit, ensuring the vesting period is appropriate. Yes they cost money but perhaps the money spent on rolling one of these out would be made back, and several times over, by an all round improved performance by staff.

OnSite Consulting is a nationwide hospitality and consulting company to the casino, hotel & restaurant market. Providing immediate solutions for sites seeking turnaround, insolvency and concept repositioning. www.onsiteconsulting.com

September 18, 2009

Sam Nazarian’s Mi-6

The club maestro is back on the L.A. scene with Mi-6 in West

Hollywood, a sleek space with visions of James Bond.

By Scott T. Sterling

Just call it the Sam Nazarian experience.

After three years cultivating hotels and restaurants as the head of famed hospitality firm SBE, Nazarian has returned to the Los Angeles club scene this week with his new West Hollywood club Mi-6 — named after the British Secret Intelligence Service (a.k.a. MI6) and meant to conjure the sleek luxury of the James Bond movies.

“It’s good to be back,” Nazarian laughs inside of a black custom Mercedes-Benz Sprinter minibus, which SBE uses to shuttle VIPs from the SLS Hotel of Beverly Hills to any of his growing stable of area properties, which includes clubs Area and Hyde, as well as the restaurants Katsuya and XVI, both of which are partnerships with designer Philippe Starck.

The scene that trailed Nazarian from the club to the minibus was worthy of HBO’s “Entourage”: A phalanx of publicists, handlers, a videographer and even a waitress with a tray of sushi paraded through the crowd straining to get inside. Many called out Nazarian’s name, and he stopped to greet some guests before hopping inside for the interview.

“It was very important for me to focus on the SLS and Katsuya, because I wanted them to be world-class establishments,” he says. “So I stepped away from night life for three years. Now I’m ready to take the L.A. club scene to yet another level of sophistication.”

It’s hard to see anyone other than Nazarian pulling off something as ambitious as Mi-6. It’s in the old Foxtail space, wedged in between two institutions: music venue the Troubadour and restaurant/lounge Dan Tana’s. The klieg light-saturated red carpet crush of willowy models, discreet celebrities and swarming paparazzi is exceedingly conspicuous on this generally low-key corner of Santa Monica Boulevard.

“We’ve developed a really good relationship with the city of West Hollywood, which is the only way we were able to pull this off,” says Bill Tremper, SBE’s vice president of sales and marketing. “They already know us through our partnership with the Abbey Food & Bar right down the street.”

“I realize it’s especially competitive in L.A. night life right now, with fantastic new clubs like Playhouse, H.wood and MyHouse,” Nazarian says. “But I believe I have something special to offer the scene. I’m working with the company MomentFactory, who produce unique multimedia environments. They did the visuals for the Nine Inch Nails tour last year, which was outstanding. What they did inside Mi-6 is really impressive.”

The fruits of MomentFactory’s labor aren’t easy to see: massive (and hidden) mirrors that double as video screens and switch between the two at intervals. The dark, three-story club was so packed that just moving around was akin to a high-fashion rugby match with the entire roster of actors on the CW network. DJs pumped a mix of Top 40 hits while tattooed waitresses brought huge bottles of alcohol festooned with sparklers to tables on the first floor. The lighting system has the ability to emit a wide array of color schemes at the push of a button.

“Competition is always a good thing. It forces innovation, better pricing and more amenities,” says James Sinclair, former club owner and now the president of night life specialists OnSite Consulting, commenting on Nazarian’s new club. “In the end, it benefits the consumer.”

Where Nazarian has a real advantage, says Sinclair, is his solid portfolio.

“Unlike someone whose entire life is invested in one location,” Sinclair explains, “Nazarian has enough profitable ventures that he can close a place for a few months while he decides what to do with it. His is a hugely mitigated risk.”

Back in the minibus, Nazarian rattled off a slew of upcoming projects, including renovating La Cienega club Halo, SBE’s recent acquisition of stalwart Malibu restaurant Gladstone’s and the impending launch of a club Hyde space inside Staples Center.

“It’s all about creating world-class establishments,” Nazarian reiterates before wading through the crowd outside of Mi-6. “I brought a level of sophistication to the Sunset Strip with XIV, which people said couldn’t be done. The SLS Hotel won best achievement in design from Virtuoso magazine, putting us next to establishments in China, Dubai and Italy. Being responsible for helping make Los Angeles part of that conversation is extremely gratifying.”

Mi-6

Where: 9077 Santa Monica Blvd., West Hollywood

When: 9 p.m. to 2 a.m. Tuesdays and Saturdays

Price: Varies according to night; call ahead

Contact: (323) 655-8000, www.sbe.com