The Advantage of Employee Ownership
Much of what you see in the calculator is similar to what you might find in any investment plan. But if you really want to understand the potential of an ESOP, we need to talk about the rate of return. The rate of return is the amount that you expect to gain on your investment. With an ESOP, it is tied to the value of your company. The higher the value, the better your investment does. This is one of the things that makes an ESOP unique. Unlike most investments, with an ESOP you and your co-workers can actually influence the value of your shares. If you buy 100 shares of a company on the stock market, you can choose to buy more shares or sell the ones you have, but you can't make your shares go up in value. But when you are both an owner and an employee of a company, you and your co-workers can help to increase the value of your stake in the company. So how can you and your co-workers increase the value of your ESOP?Past, Present and Future
In most cases the price of a company's shares is tied to its performance. A business that makes money is usually worth more than one that is losing money. Here are some examples of how an employee can make a difference:Sales
An increase in revenue is the most obvious way. Let's say that you make a large sale to a customer. Revenue goes up, and the end of year results improve. That in turn can lead to an increase in the value of your shares.
Expenses
What if you're not in a position to win new business? One way to improve performance is to cut expenses. Let's say you work at a car manufacturer, and you figure out a way to lower the cost of making a car. Even though the revenue is the same, expenses drop, so the company's profits are up. Many employee-owners have increased the value of their shares simply by thinking of new ways to eliminate waste and improve efficiency.
Intangibles
It isn't always about money. Even things that aren't directly connected to revenue and expenses have an effect on a company's value. Things like positive customer reviews and meeting internal schedules can make a difference. The key factors vary, so it pays to keep informed about what your company's performance goals are, and how they can be met.
Teamwork
One of the keys to success in an ESOP company is the ability to work as part of a team. We've talked about how you can make a difference, but your effectiveness is multiplied when you work together with other employee-owners. Finding new ways to collaborate with and encourage your fellow employee-owners is a good way to make a difference.
The Future
A company's value isn't based solely on how much money it has made in the past. Let's look at a dramatic example. What if you help the company land a big, multi-year contract that will double its revenue? The contract is for next year, so there hasn't been any revenue from it yet. Has the value of the company gone up? There's a good chance that it has.
Business valuation also looks at a company's future. Obviously, no one knows for sure what next year will bring, but if a company's forecasts look promising, the value will probably reflect that.
The Bottom line
The end result of all of this is that there's always a way to make a difference. Many employees find being part of an ESOP to be an empowering experience. An ESOP member is often referred to as an employee-owner, and with good reason. You're an employee, but you're also one of the owners of the company. Like any owner, you can benefit from your company's success.