TIME: Almanac 1990/1990 Time Magazine Compact Almanac, The (1991)(Time).iso/time/020689/02068900.020

Text File | 1990-09-17 | 7.9 KB | 142 lines

BUSINESS, Page 50

They Own the Place

Employee-stock plans come of age as morale boosters and

takeover tools

By Frederick Ungeheuer


    In thousands of American companies large and small, the
employees are starting to act as if they own the place. Well,
they're entitled, because they do. Meet the new breed of
hard-driving capitalist: the employee stockholder. At Oregon Steel
Mills in Portland, the chairman's secretary has earned $500,000 in
company stock, and a few of her colleagues have become paper
millionaires. At Quad/Graphics, a Wisconsin printing company, the
average five-year employee owns shares worth $250,000. In Avis
car-rental offices across the U.S., employees are touting their
stake in the company with lapel buttons that put a new twist on
their old "We Try Harder" slogan: OWNERS TRY HARDER.

    The Employee Stock Ownership Plan, or ESOP, has rapidly come
of age. Ten million U.S. workers,  about one-fourth of all
corporate employees, are  enrolled in an  ESOP, up from 3 million
only a decade ago. More than 9,800 companies in the U.S. offer such
programs, including 1,500 in which employees own the majority of
the stock. By giving workers a stake in the company's success,
enthusiasts say, the programs boost morale and productivity. But
the popularity of ESOPs, which were initially created in the 1950s,
has been fueled in the 1980s by an unintended and somewhat
controversial application: as a double-edged tool useful for both
financing corporate takeovers and staving them off.

    Thanks to hefty tax breaks that the Government allows for
ESOPs, investors who launch a takeover can reduce their borrowing
costs if they set aside part of the stock for employees. At the
same time, corporations seeking to repel raiders can use an ESOP
as a way to put a chunk of the company into relatively friendly
hands. "Every corporate treasurer is looking at it," says Paul
Mazzilli, a principal at the Morgan Stanley investment firm. In
recent months, three major corporations -- J.C. Penney, Ralston
Purina and Texaco -- spent a total of $1.75 billion on ESOPs to
shore up their takeover defenses. Procter & Gamble announced plans
in January to spend $1 billion to boost its ESOP from 14% of
outstanding shares to 20%, partly to ward off raiders.

    The most hotly contested use of an ESOP is at Polaroid, which
has put 14% of the company's stock into employees' hands as a
maneuver in its bitter six-month battle against a takeover bid by
Shamrock Holdings, owned by the Roy Disney family. Because
Massachusetts-based Polaroid is incorporated in Delaware, where an
anti-takeover law requires that bidders must get 85% ownership of
a target company to gain control, the ESOP is leaving Shamrock with
almost no room to maneuver. When a Delaware court rejected
Shamrock's challenge of the ESOP, Polaroid's workers "jumped up and
down with joy," said Nicholas Pasquarosa, chairman of the employee
committee. "We have developed loyalties here the way you do in a
family." Shamrock is appealing the decision.

    Pioneered in the 1950s by Louis Kelso, a San Francisco lawyer
and economist, ESOPs were slow to catch on. But Kelso eventually
created a fertile financial climate for his idea by enlisting the
support of Russell Long, the populist Democrat from Louisiana.
Before retiring from the Senate Finance Committee in 1986, Long
initiated more than 20 bills to encourage  creation of ESOPs.

    One tax incentive allows a company sponsoring an ESOP to deduct
not only the interest on the loan to buy stock for the plan but
also the principal. Another tax break gives banks and other lenders
a 50% deduction on their income from ESOP loans, which enables them
to charge lower interest rates to companies that borrow for such
programs. "These are the kinds of tax incentives that corporate
owners dream of," says ESOP expert Joseph Blasi of California
Polytechnic State University in San Luis Obispo.

    Because Kelso's method of paying for the stock-purchase plans
was to borrow against corporate assets, ESOPs also gave rise to
the leveraged buyout. But Kelso never intended his technique to be
used for buyouts that would put all of a company's stock in the
hands of a few investors and top managers. "That is a perversion
of my idea," says Kelso, now 74. "Instead of making economic power
more democratic, they make it more plutocratic."

    This was not the case at Avis, which in late 1987 was bought
by its workers for $1.75 billion. For Avis employees, who borrowed
all the money for the deal, the ESOP ended ten tumultuous years in
which the company had five corporate owners. "We needed stability,
once and for all," says Chairman Joe Vittoria, 53, who has worked
in the industry since 1961.

    In the Avis program, the company's 24 million shares are held
in a trust and gradually released to employees as the debt is paid
off over a 17-year period. Vittoria reserved 13% of the stock for
key managers, "the 132 people I cannot afford to lose," who
initially got at least 294 shares each. The other 12,300 employees
were given a first-time allocation of two shares for every $1,000
in salary. Since each share is worth about $5 and the average Avis
employee earns about $20,000 a year, this amounted to $200 or so.
But the 1988 allocation will be seven shares, which are growing in
value, per $1,000 in salary.

    "Over time they'll be able to watch the value of that stock
jump," says Avis Treasurer Gerald Kennell. One catch: employees
must stay at least five years before they can cash their shares.

    The ESOP program has boosted the company's performance, in part
because managers have put their employees' new motivation to good
use. Avis has also found that its customers support  employee
ownership, which the company touts in its ads. One TV spot shows
a satisfied customer pointing to an Avis rental clerk and saying,
"I know the owner."

    If a company thrives, ESOP participants can grow a nest egg
far beyond the means of most wage earners. At Quad/Graphics, which
prints hundreds of catalogs and magazines, including a regional
edition of TIME, the value of ESOP shares has risen from 6 cents
in 1975 to $5 currently. The company's 3,500 workers own 18% of its
stock, with the prospect of eventually acquiring an additional 12%.
In the case of Stone Construction Equipment, a small firm in
Honeoye, N.Y., company heir Alan Stone no longer wanted to run the
operation, so he sold it two years ago to his 200 employees for
$4.5 million. Since then, annual revenues have jumped from $12
million to $30 million. The company's shares are scheduled to be
distributed to employees within ten years.

    For all their promise, ESOPs can mean sacrifices  for workers.
In many instances, employees accept wage concessions in return for
their stock. The United Steelworkers of America has saved dozens
of failing mills in such wage-for-stock trade-offs. In distressed
industries faced with low-wage foreign competition, says James
Smith, a U.S.W. staffer in Pittsburgh, "one of the ways American
workers can compete is by having some investment income along with
a lower labor income." But an ESOP is no guarantee that a company
will thrive. Despite its stock plan, New Jersey's Hyatt Clark
Industries, a ball-bearing maker, collapsed in 1987 because of poor
labor relations.

    The ESOP surge has raised some eyebrows in Congress. For one
thing, ESOPs were never intended as a way for corporate managers
to entrench themselves against takeover bids or for corporate
raiders to enrich themselves. For another, the cost of providing
the tax breaks is running as high as $3 billion a year at a time
when deficit cutting is urgent.

    But for now the ESOP may be politically secure. Few legislators
can be expected to go along with reducing an incentive that in most
cases is likely to boost the spirits and competitiveness of
America's workers.