stated purposes-without unduly diluting retirement income or capital accumulation objectives of the plan. Young people may wish to use part of their profit sharing to buy a home; those around age 45 may need profit sharing money to cope with financial or medical emergencies. Access to cash when participants need it for purposes which contribute to their long-term security-makes profit sharing benefits tangible and currently valuable, not "pie in the sky" 40 years down the road at retirement. ESOPS have difficulty incorporating partial withdrawal features because all disbursements from an ESOP have to be made in own company stock "in kind." The participant must sell the stock immediately (either back to the ESOP or on the open market) to generate the cash needed for his withdrawal purpose-with adverse tax consequences. Another point. Many ESOPs are not designed to invest exclusively in own company stock. No more than 67-70 per cent of the portfolio is intended to be in own company shares. The balance is in fixed-income investments or cash equivalents with an eye to meeting the liquidity requirements of the trust upon disbursement. Under most ESOPS, employees do not have any investment choice. They do not have investment options with respect to the portion of their account in company stock nor in diversified investments. ESOP participants cannot even reduce their market exposure in the years very close to their retirement by shifting their balances out of company stock into more conservative funds. Under profit sharing, this investment choice flexibility is frequently extended to plan members. Several funds are set up-e.g., an equity fund, a bond fund, an own company stock fund, and/or a guaranteed principal plus interest fund. Participants are granted options over "new money" coming into their accounts from company/employee contributions, and, in addition, have transfer-of-balance privileges at any age or at least in the 5-10 year period immediately prior to retirement. A good example of this investment choice flexibility is reflected in the Savings and Investment (profit sharing) Plan of Eastman Kodak Co.2 Each participant has an annual choice over how he wants his deferred money invested. He may have it deposited all in one fund, equally between any two funds, or equally among all three funds: Fund A-Kodak common stock; Fund B-Diversified group of securities, including fixed interest-bearing securities, preferred and common stock, and participant loans; Fund D-Fixed income fund-a group annuity contract with an insurance company. Participants may also direct the trustee to transfer part or all of the current value of their account(s) to another fund (s). This can be done only once in a calendar year but can be done by a participant at any age. At the end of 1976, 73 per cent of Eastman Kodak's profit sharing portfolio was invested, by employee investment choice, in Eastman Kodak's own stock (Fund A). Fund D was second in popularity, followed in the distance by Fund B. Under ESOP regulations, restrictions are also imposed in the area of final disbursements. If an ESOP participant retires, he must be paid his account balance in own company stock, even if he immediately turns around and sells the stock back to the ESOT. This can be a very cumbersome procedure. If a plan member had a $10,000 account with only $6,000 invested in company stock, the ESOT trustee might have to borrow $4,000 worth of company stock from the other participants to distribute $10,000 in stock to this retiree. The next minute the trustee might buy back the $10,000 in stock at a higher acquisition cost for the ESOT than its prior average acquisition cost. Other, more manageable, techniques are sometimes available. Most ESOPs do not permit installment payments from the trust or allow for the purchase of annuities-even though these disbursement modes might better meet the needs of retiring participants in certain situations. In other words, there are a number of areas where ESOPS do not have the flexibility of profit sharing plans. This plan feature strait-jacket for ESOPS is most unfortunate. Plan features should be designed to motivate. 2 Bert L. Metzger. Profit Sharing in 38 Large Companies: Piece of the Action for 1,000.000 Participants (Evanston, Ill. Profit Sharing Research Foundation, 1978). 3 Fund C invested in U.S. government securities was frozen in 1975, closed to further contributions or transfers from other fund(s). 4. Link to profits Much publicity recently has been given to conversions of profit sharing plans to ESOPS. This does not reflect disillusionment with profit sharing. This reflects disillusionment with the stock market. We have not seen a retreat from profit sharing. We have seen a change in investment philosophy-from a profit sharing plan with diversified investments to profit sharing ESOPs with primary emphasis on own company stock. In effect, we are seeing profit sharing ESOPS and EPSOP's (Employee Profit Sharing and Ownership Plans) created akin to the kind created by Von Thunen. Many major U.S. corporations have profit sharing trusts heavily invested in own company shares (EPSOPs, if you will). Profit Sharing Research Foundation's major study of Profit Sharing in 38 Large Companies shows that 36 out of the 38 companies invest at least to some extent in own company stock. In fact, in 17 out of the 38, company shares represented from 60 percent to 100 percent of the total portfolio. At the end of 1976, $5.9 billion out of $9.9 billion (60 percent of the total) was invested in own company shares. The concepts of profit sharing and stock ownership are very consonant. Medium-sized and small companies have more difficulty under profit sharing investing in their own stock and this is where ESOPs are coming into greater play. There are four ways to fund an ESOP-gift, thrift, cost, or gain. Gifts of own company stock to employees are laudable but rare. Thrift in today's inflationary economy is hard to achieve and inadequate to the task. We can barely keep up with required contributions to Social Security. Cost, or a money purchase concept-e.g., 10 percent of compensation of participants each year irrespective of profit levels can be used but this entails high annual charges against the business unrelated to its ability to pay. This is neither cost effective nor cost predictable (in light of inflationary wage increases). Even more serious, a fixed percentage of compensation constitutes a give-away program! You lose a great motivational dimension in your plan if year after year you contribute a fixed percentage of pay irrespective of the efficiency and profitability of the company. Whether the company succeeds or not, you simply give participants 10 percent of pay. Now admittedly, the company contribution is converted into own company stock and you have created the stock ownership incentive but you have lost the sharing incentive. This contrasts sharply with the philosophy of profit sharing which views the company contribution as an earned reward in relation to the organizational efficiency of the business. If the profit is there, and you made it with employee cooperation, they get it! If you do not make it, they do not get it. Then you have a double incentive working for you-sharing current profits with employees through profit sharing and long-term growth through stock ownership. Even leveraged ESOPS can be profit sharing ESOPs by agreeing to share a specific percentage of profits with your people-e.g., 20 percent of before-tax profits-with a minimum contribution each year adequate to amortize the outstanding loan over the designated period. 5. Communication/economic education The study of ESOPS recently completed by 5 graduate students from UCLA emphasized many positive aspects of ESOPS but also threw light on some negative ones.* "Many companies indicated no difference in the level of employee motivation resulting from the plan. The greatest number of these claimed that the complexity of the plan and the difficulty of making an intangible benefit appear real was responsible for the apparent indifference or confusion on the part of the employee... "Even in those companies where perceived employee response was considered good, management stressed the importance of an on-going educational program to sell the ESOP concept.' 996 The success of the plan in motivational terms depends vitally on how well the plan is communicated. In effect, you must create a "new language" between 4 Matthew J. Bonaccorso, Sheridan M. Cranmer. David G. Greenhut. Daphne T. Hoffman, and Niel Isbrandtsen, Survey of Employee Stock Ownership Plans: Analysis and Evaluation of Current Experience (Los Angeles, California: University of California. Los Angeles. Graduate School of Management, December, 1977). 5 Ibid., page 19. • Ibid. management, employees, and stockholders-a common language for building understanding and mutual goals. Creating a new language is not easy! You may or may not have seen the movie, Close Encounters of the Third Kind. Accompany me, if you will, to Devil's Tower and Sky Harbor. In the relevant scene, scientists from earth have made contact with extra-terrestrial people. The scientists are attempting to communicate with these creatures from outer space by using a newly created mathematical/musical language. The exchange in the movie and on the soundtrack is called "The Conversation." Listen! "The Conversation" from Close Encounters of the Third Kind. Commentary by speaker during playing of tape: "The first link, they have developed the first link! See they are beginning to communicate; it is not coming easily but... they are achieving it. Now they are swinging, they are communicating. They are exchanging concepts and feelings." Ladies and gentlemen, you have just witnessed the creation of a new language! What I am implying is that you must develop a new language and learn how to communicate in a meaningful way with your employee shareholders. You can not use the same anachronistic dialogue befitting an adversarial relationship as you strive to move to a cooperative relationship. Many things must be done! The purposes and features of the plan must be understood and appreciated by the participants. To bring this about, appropriate materials, such as summary plan descriptions, graphic booklets, annual reports, slide/sound presentations, individual account statements, and the like must be prepared. Meetings with employees should also be held—large or small groups depending on the size of your business. In other words, you should use the standard techniques of written, audio-visual, and verbal communication to convey the objectives and provisions of your plan. All very important... but not enough! It is one thing for participants to know plan provisions and another thing for them to perceive enough about the company to develop a close identification with it. Employees should understand the history of the organization, where it came from and where it is going, what have been its achievements and what have been its failures. How can employees identify with the corporate family unless they know quite a bit about its heritage and its tradition? What is the corporation's raison d'etre? Why does the organization exist? What is its primary purpose? What product or service is the company offering to the public that it can produce faster, better, or cheaper than anyone else? What is your company's value to society? If you want to turn people on, particularly young people, you had better give them something worthwhile to which they can dedicate themselves. If you want them to stretch, grow, contribute, and perform, your corporate image should immediately convey to their minds the value of your company to society. This may be strictly a commercial value the satisfaction of a legitimate human need at a price people can afford to paybut, in any case, it must generate pride within your people to know they are part of this worthwhile endeavor. Once a year, the President of the U.S. delivers a "State of the Union" message. Why should not corporate persidents deliver "State of the Company" messages several times a year to their employees? How is your company progressing? What are your competitors doing? What are their strengths and why are they taking some of the business away from you? What can management and employees do about it? How are people supposed to help you win in any activtity unless they know the score? They must know the score on an ongoing basis-not just at the end of the game-but inning by inning, quarter by quarter. In sports, if players did not know the score till the end of the game, can you imagine them winning the game? Not even the Los Angeles Dodgers could do that! Talk about communicating. It should go even beyond all of the above. Business leaders should be communicating about the whole private enterprise system, the American economy, and what it is all about. What is a free market economy? How much does a typical manufacturer make in a free market economy? Is it the twenty-eight to thirty-two cents on the dollar that the average American, German, or Englishman believes? Certainly not! It is five to six cents on the dollar. What is the average return on investment. Is it 40 to 50 per cent that some college students say is justified? Certainly not! On an after-tax basis, it is 12 to 14 per cent return on equity. The most distressing phenomenon I observe is that management people who have the greatest stake in their employees knowing the economic facts of life— are unfortunately so busy about the business of business that they do not have (take) the time to create and protect a climate in which business can thrive. All around the world the private enterprise system is under attack and is carying out for constituents. What an opportunity business leaders with profit sharing/share ownership systems in their companies have to demonstrate that a "broadly-owned, sharing capitalism” will produce a higher standard of living for more people than any other system ever conceived by man. 6. Sharing productivity/profit gains with employees You must share productivity gains with your people through your ESOPs. Most hourly-paid employees believe that they do not derive and direct benefit from increasing productivity. They feel stockholders and managers benefitthe "other guy" benefits-but not themselves. In fact, wage employees are inclined to think that the other guy benefits at their expense. Increasing productivity, to hourly-rated people, means that they will be automated out of their jobs, have to work harder (speed-up), and/or will work themselves out of their jobs that much faster. Higher productivity conveys job insecurity—it is pereceived as moving the worker that much faster toward the back door. You must overcome these negative, but very legitimate, concerns among your employees. You must convince them that through your stock ownership program, productivity is definitely recognized and rewarded. Yours is a sharing company. That point should come through loud and clear. 7. Importance of each tem member Every member of your team is important. Everyone on the team has a significant position to play or he should not be on the team. Respect his contribution, call for it, and you will get it. 8. Employee involvement. Involve your employees. Not enough companies create structural changes within their organizations (when they introduce a system incentive program like an ESOP) to that employees can help them run a more efficient, productive business. In September, 1977 I participated in a Work in America Institute conference in New York. Carl Frost from Michigan State University emphasized at the conference Scanlon plan techniques for employee involvement. These techniques are extremely worthwhile and can be employed to great advantage by ESOP companies. Production Committees are organized in every department of the company. Each committee consists of the foreman/supervisor and an employee elected by his own peers. The committee's special responsibility is to solicit and process suggestions for cost reductions, productivity improvements. Ideas which make sense and lie within the jurisdiction of the committee are immediately put into effect. If a suggestion involves major changes in engineering, layout, product cost, packaging, and the like, other resource people are brought into the discussion. All suggestions are sent to the company's Screening Committee. This committee is made up of the chief executive officer and his key staff people. On a monthly basis, the Screening Committee reviews all ideas put into effect at the Production Committee level and discusses concepts that require further input and refinement. Through these structural modes, a climate is created conducive to continuous changes for the better. McCormick & Company, Inc. uses a Multiple Management Board System to generate beneficial results. Problem-solving teams are created which work to effect productivity increases, quality improvements, better ways to do things. Tailor participative modes to your own company but get your people involved. How else are we going to compete with the Japanese who already have 7,000,000 workers organized into quality control circles? Seven million Japanese trying to cut costs are hard to beat. No wonder the U.S. dollar continues to slide as against the Japanese yen. 9. Diversity of security resources I get very distressed when people like Joseph Califano, Secretary of Health, Education and Welfare (HEW), suggest that the private retirement income system in this country be completely wiped out in favor of an expanded Social Security program. This would be tantamount to concentrating all of our longterm security resources in one very leaky vessel. Von Thünen warned us about political solutions to economic problems. Private qualified defined contribution and defined benefit plans provide diversification of retirement income resources. They build economic strength into the individual, making him less dependent on governmental programs. Also, under individual account plans like profit sharing and ESOP programs, individuals can affect the ultimate amounts in their accounts ((at least to some degree) by superior work performance. These plans provide motivation at the level of the enterprise where wealth is created. There is little or no motivational value in Social Security. Nobody ever worked harder so he could get a larger Social Security check. Please do not get me wrong! I believe Social Security has its place in the spectrum of retirement income resources, but I feel all of us aware of the value of private plans should collaborate to protect/improve the spectrum. 10. Hierarchy of incentives Fish determine the bait ! Remember that sage observation in evaluating the motivational value of your ESOP. Individuals differ considerably. They respond to different incentives, even at different stages of their lives. A fully deferred ESOP, with no withdrawals during employment, with benefits paid only after a member retires or terminates, has its own unique appeal. It provides a long-term, stock ownership incentive-perhaps as strong (or stronger) in its own right as (than) a short-term cash incentive. Nevertheless, because of the great variations between people, it it frequently advantageous to have other performance reward systems operative alongside your deferred ESOP. My advice is to permeate your company with an incentive philosophy. Create a "hierarchy of incentives" from individuals on up-through small teams, departments, plants- to the entire corporation. Shoot your organization through with incentives from bottom to top-some cash, some deferred; some psychic, some financial; some short-term, some longterm. Share profits, responsibility, and ownership. Turn your people on to high productivity. CAN CAPITALISM SURVIVE? We are striving to do something extremely dramatic-something that has never been done before in the history of the world. In all industrial societies, ownership has always been concentrated in the hands of a few-a few private hands, a few bureaucratic political hands, or (now under the Meidner proposal for Sweden) possibly in a few union leader hands. We have an opportunity today to create a society where we do not have concentrated ownership, but diffused ownership among millions of our people. A while ago, Time magazine presented an article entitled, "Can Capitalism Survive?" After analysing the history of capitalism and all the pros and cons about the system, the article ended with the rather depressing prognosis: "It is the worst system-except for those other systems that have been tried and failed." I maintain that capitalism can survive if it is a "sharing capitalism”—with broad numbers of our people having a direct stake in efficiency profits and in ownership of the companies for which they work. A "sharing capitalism" can not only survive, but thrive. FEDERATED DEPARTMENT STORES, INC., Hon. RUSSELL B. LONG, U.S. Senate, Russell Senate Office Building, DEAR SENATOR LONG: I would like to take this opportunity to transmit to you the enthusiastic endorsement of Federated Department Stores, Inc. for S. 3241, your proposal to make employee stock ownership plans more attractive to labor intensive companies such as ours. We have had a profit sharing plan through which we encourage and aid employee stock ownership for many years, to which we added an employee stock ownership plan, with nearly 31,000 employees now participating. The changes in the tax laws you have proposed in S. 3241 would make it possible for us to expand this latter plan substantially, which we believe to be beneficial both to our employees and to our Company. |