Insights on business -- and life.
Employee Stock Ownership Plans
Another example of unintended consequences.
by Mike Hartnett (December 15, 2008)
Creative Memories declares bankruptcy because of problems. Two major
industry publishers were sold because of success. All three had
something in common: they were owned by the employees, thanks to
Congress passing the Employee Stock Ownership Plan.
In the 1980s Congress passed legislation that was intended to
allow companies to sell themselves to their employees. The goal was
simple: 1. Companies will perform more effectively if
employees have a stake in their success. 2. Entrepreneurs and
their families can avoid onerous inheritance taxes.
An example is PJS Publications, once the magazine division of the
Peoria (IL) Journal Star newspaper owned by a man named Henry
Slane. In the 1980s PJS was the largest publisher of
industry-related magazines. (The titles included the trade magazine Profitable
Craft Merchandising, later absorbed by Craftrends; Crafts,
later renamed Paper Crafts; Sew News; and others.)
But Henry's first love was the newspaper, and he hated newspaper
chains. He realized his heirs would probably have to sell his precious
newspaper to a chain in order to pay the inheritance taxes. Recently
the Wrigley family of chewing gum fame had been forced to sell the
Chicago Cubs baseball team for exactly that reason.
But thanks to this new ESOP legislation, Henry's dilemma was
solved. Henry sold the company to the employees and everyone was
happy. Henry got his money but retained the position of company CEO.
Employees received stock in the company in exchange for their
company pension plan. Plus, employees would buy additional shares of
stock tax free, in addition to receiving free stock.
I was editor of Profitable Craft Merchandising at the time
and, like other employees, made out like a bandit. I received shares
that were, I believe, 7% of my salary (in addition to the full
salary). Plus I could buy additional shares that were deducted from
my gross salary – and therefore not taxed – and additional stock
I purchased was matched by the company.
One of the requirements was I would have to sell my stock back to
the company when I quit or retired. That way, no evil chain could
swoop in and buy the newspaper and magazines.
Once a year, an independent auditor would check the company's
books and determine the price of a share of stock. Every year the
price went up. My memory is foggy, but I believe a share was about
$15 when the program started. When I left about five years later to
become editor of Craftrends, the price was about $75.
This was a goldmine for the owner and the employees; I finally
concluded it was the taxpayer who was paying at least a part of all
The newspaper and magazines were too successful. The stock price
went too high. For example, there was a case of a janitor who
retired after 30 years or so. His stock was worth more than $1
million – and the company had to buy it.
Think what that would do to your cash flow.
Finally the company was forced to sell. The magazines went to a
New York investment firm, Veronis & Suhler, which specialized in
magazines. Henry's beloved Peoria Journal Star was sold to
– you guessed it – a newspaper chain.
The story was very similar at Krause Publications, once the
publisher of CNA, Michaels Create!, and other
industry-related magazines and books. The company was sold to F+W
As I reported in a previous issue of CLN, Creative
Memories ESOP situation worked in reverse. Sales and profits
slipped, which inspired some employees to leave before the value of
their stock declined even further. Their departure created cash flow
problems which simply exacerbated the company's problems.
ESOP is a wonderful program that achieves its goals – as long
as the business doesn't do too well or too poorly. Go figure.