Motivating Employees: Participation and Ownership Are Keys

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November/December 1991 

At Conservit Inc., treating employees fairly means rewarding them with shares in the company and cash bonuses. Among the results: Employee turnover decreased 27 percent in five years.

By Jack Metzner and Dawn Kurland Brohawn

Jack Metzner is a vice president at Conservit Inc. (Hagerstown, Md.). Dawn Kurland Brohawn is director of employee participation and communications for Equity Expansion International (Arlington, Va.).


Like virtually every other firm in the scrap industry, Conservit Inc. is concerned with improving productivity, controlling costs, and operating as safely and efficiently as possible. And, like a growing number of companies in various industries, Conservit is addressing these factors by taking steps to increase employee participation and instill an ownership mentality in its workers.

But, while many firms are simply talking about getting their employees to think like owners, Conservit has taken steps to increase employee involvement and is gradually building share ownership of the company into each of its 65 management, administrative, and production personnel.

It’s all part of the company’s commitment to value-based management, an ethical framework that recognizes the interdependence between moral values--treating people with fairness and dignity--and material values--increasing productivity and profits. Value-based management centers on three fundamental principles:

Build the organization upon shared ethical values. Ideally, every person in the company--from the chief executive to the entry-level laborer--should help develop and reach a consensus on the company’s core values (the principles that guide its corporate objectives, policies, and other decisions affecting its role in the global marketplace) and code of ethics expected of all employees (the behavior and performance geared toward strengthening the company and interpersonal harmony). The core values and code of ethics should be expressed in writing and subject to periodic review. Constructing these guidelines is designed to unite employees around a common understanding of how their self-interests fit into the company’s visions.

Deliver maximum value to customers. Success in the competitive marketplace is linked to maximizing value to customers by increasing quality and/or decreasing price.

Reward people for the value they contribute and produce. Employees must have the opportunity to participate in generating value for the company and should be rewarded for their contributions.

These principles are, of course, ideals, which are far from full realization at Conservit. Old management systems do not change overnight, but the company is working to improve them.

Building a Business Style

Conservit was founded in 1974 by Sid Metzner and the late George Sellers, who, along with 18 other employees of a western Maryland scrap processing firm, left that operation to embark on a new venture.

Four years later, the company made its first move toward value-based management, implementing an employee stock ownership plan (ESOP), a special type of benefit that provides employees an opportunity to become part-owners in the firm and enjoy some of the benefits hard work and wise decisions can bring. The partners' motivations for installing an ESOP were twofold: They wanted to share ownership rewards with the employees who had risked the security of their old jobs to start Conservit and they wanted a readily accessible market for their stock in anticipation of retirement.

Simply offering the ESOP, however, did not motivate employees to think like owners. Little or nothing was done to inform people about the ESOP. In fact, until they received their ESOP statements at the end of their first year of eligible service, most new employees were unaware they were becoming shareholders in Conservit. Without that knowledge, it was unlikely that employees would feel like they had a real stake in the company. Furthermore, the primary management style at the firm was autocratic, with every decision-large or small-made by Sid and George.

In the mid-1980s, Jack Metzner and Mark Sellers, the founders' sons, began to assume responsibility for the firm's day-to day operations. In an effort to improve the way the company was directed, the two decided to change the company's management approach, with a priority put on educating personnel about the ESOP-and the benefits, rights, and responsibilities that go with corporate stock ownership.

What Is an ESOP?

An ESOP is basically an in-house, tax-exempt stock exchange that is one of the most powerful and practical programs for enabling workers with little or no savings to become owners of significant equity shares in their employer company. Although specific aspects of an ESOP--such as which employees are eligible, how shares are apportioned, and whether dividends are paid out--are tailored to a company's particular needs and objectives, ESOPs generally provide employees with production incentives, retirement funds, and, when shares are linked to the proceeds of the company, a reward system. They also provide two-way accountability and communication between management and nonmanagement employees, allowing personnel to participate both as employees and as stockholders in defining corporate direction.

In short, ESOPs offer employees the opportunity to own a piece of their company, which can motivate them to make the most of their work, encouraging increased productivity and profits.

But that's not the only benefit ESOPs offer to employers. In fact, an ESOP is the only tool in the world of investment finance that can generate new sources of capital credit for corporate growth or transfers of ownership, insulate its eventual owners from direct personal risk in the event of a default, and allow repayment of its entire debt in pre-tax corporate dollars.

ESOPs also offer a number of tax incentives (subject to certain rules), which have helped to spark the formation of more than 10,000 ESOPs in U.S. corporations since 1958:

Companies can deduct both principal and interest on loans to an ESOP used to acquire employer stock.

Lenders can exclude from taxable income 50 percent of the interest earned on ESOP loans, thus allowing them to offer lower interest rates for loans to ESOPs.

Companies can claim a deduction for dividends paid on ESOP-held stock, provided the dividends are either applied to repay an ESOP loan or paid out to employees on a current basis.

Employees can defer taxes on their ESOP accumulations until they cash out their shares when they retire or terminate their employment. (These shares are generally purchased by the ESOP or the company.)

When shareholders sell their stocks they can roll over the proceeds into securities of other operating companies.

Specifics of the Conservit ESOP

All active, full-time employees of Conservit are eligible to enter the company's ESOP on the first anniversary date (Oct. 31) of the plan following 1,000 hours of service. Every Oct. 31 thereafter, the firm makes contributions of stock or liquid assets to the ESOP accounts of participants who remain eligible on that date. Employees who retire, die, or are permanently disabled during the plan year also receive ESOP contributions for that year.

While the amount of each contribution is based on the employee's salary, because contributions are made on an annual basis, seniority as well as salary level determine the number of shares in an employee's account. Employees are fully vested--in other words, entitled to all accumulations in their ESOP accounts--after six continuous years of service with Conservit. Currently, the ESOP holds a little more than 40 percent of total company shares, with the balance held by a few major stockholders.

In an effort to communicate through dollars the meaning of share ownership, Conservit has been distributing dividends on ESOP stock at the end of profitable years since 1988, 10 years after the ESOP was installed. Because dividends are paid out on the basis of shares in a participant's account, and the size of that account is based on salary and seniority, a lower-paid worker who has been with the company for many years would receive a larger dividend than a newly hired but better-paid employee.

Participants in the Conservit ESOP share in the downs as well as the ups. When company shares were appraised last year, they showed a 31.4 percent decline from the previous year's value, reflecting the recession in the scrap industry and the general economy. This meant that, despite new contributions made to the ESOP accounts and additional earnings in the cash account, the value of each share dropped from the high levels appraised in 1988 and 1989. For example, after participating in the plan since its inception, an employee earning an annual salary of $19,500 held in his account approximately $43,000 worth of company shares and other investments (cash and other liquid assets) last year. If the stock had retained its 1989 value, his account would have been worth approximately $58,000.

Value-Based Management: Establishing a System

While taking part in company ownership is an important aspect of value-based management, ownership without participation is considered incomplete ownership since, though it may connect people with the fortunes of the company, it prevents them from developing a full ownership mentality--one that encourages risk- and responsibility-sharing along with gainsharing.

On the other hand, value-based management recognizes that participation without ownership tends to be manipulative or paternalistic since participation is then subject to removal by those holding real power--the owners of the corporation. Participation without ownership also ignores a simple aspect of human nature: People care most about that which they own.

The ideal motivational force, therefore, is participatory ownership. In fact, studies by the U.S. General Accounting Office, the National Center for Employee Ownership (Oakland, Calif.), and the Brookings Institution (Washington, D.C.) show that companies that combine an ESOP with some form of worker participation program and/or cash productivity bonuses achieve measurably higher productivity and profitability than their competitors that lack ESOPs.

To instill ownership and participation in its employees, a company should consider offering the following:

A structured, profit-based program of share ownership (such as annual ESOP contribution) with cash dividend payouts to reinforce the ownership consciousness.

Regular economic reinforcement through monthly or quarterly bonuses linked to profit centers within the company and annual, companywide profit-sharing bonuses tied to overall company profits.

An organized program of employee shareholder education. In order to have effective ownership participation, personnel must understand the basic concepts of the business--where profits come from, what stock is, and the many factors affecting the value of their equity. A well-structured education program also should help employees understand their roles, rights, and responsibilities both as shareholders and as workers.

Allocations of responsibility that encourage and allow people to assume more responsibility. This calls for a structure that enables people to have a voice in decisions affecting their ownership and jobs, play an active role in the company's future planning, exchange information and require accountability up and down the corporate ladder, and participate in the firm's conflict-resolution, grievance, and adjudication system.

Involvement and support from top management. Little enthusiasm will ever be generated among the work force if the company's leaders don't express their commitment to value-based management.

Putting It to Work

Although the concepts of value-based management fit neatly into categories, implementing them is not nearly so precise, as the Conservit story demonstrates.

As a complement to the ESOP dividends, the company instituted a monthly bonus program in October 1988 to provide all employees with some immediate feedback on the firm's overall performance. When Conservit has a profitable month, each employee is rewarded with a percentage of the profits in the form of a cash bonus--averaging $150 per month per line worker and $275 per month for supervisors.

While top management and production supervisors feel that the cash profit-sharing bonus is a good idea, they are not satisfied with the motivational effectiveness of the program. One change being considered is to break down the profits-and the bonuses-into cost centers to better recognize individual performance. Thus, if the shredding operation had an especially profitable month, but the nonferrous department only made a small profit, bonuses for employees working with the shredder would be much larger than those for the nonferrous workers. A different formula, perhaps emphasizing attendance and work flow, would have to be devised for maintenance and administrative staff.

About the same time that the bonus program was established, Conservit also began to increase employee involvement in the decision-making processes of the company Among the vehicles introduced to elevate involvement were suggestion boxes, regularly conducted evaluations of employees, and a regular series of meetings geared toward specific groups-executive meetings, transportation meetings, safety meetings, administrative staff meetings, and more.

Another step Conservit has taken in the direction of value-based management is educating all employees to develop their participation skills. Because most of the company's supervisors sorely lacked the managerial training necessary to increase employee motivation and participation, in late 1990 Conservit hired Human Equations Inc., a Baltimore-based management training firm, to strengthen the motivational and communication skills of key management and supervisors, so they, in turn, could effectively teach these skills to other employees.

In order to determine a baseline for measuring future progress, the nine-month program began with a series of meetings, interviews, and surveys of top managers and selected supervisors. The findings also helped the training firm determine Conservit's specific needs and design two corporate development programs to meet those needs.

Every company employee participated in the first development program, "Becoming More Important in My Company," which emphasized problem-solving and communication skills as a foundation for promoting effective teamwork and instilling a companywide ownership mentality.

The second program involved fewer employees--10 supervisors and the 2 vice presidents. "Profit Recovery Management" focused on changing management behavior, starting with those in leadership positions, from an orientation of intimidation to one of trust, respect, and creative collaboration.

Piecing Together Results

Although the results of these value-based management efforts can't be separated from the fact that they were implemented during some of the scrap industry's most profitable years, some credit must go to the management philosophy for a number of positives seen in recent years:

1989 and 1990 were two of the most profitable years in Conservit's history, allowing the firm to expand its facilities and equipment.

Over the past four years, Conservit has gone from being almost uninsurable to being recognized by CNA Insurance Cos. (Chicago) as a national leader in safety. According to a June 1991 CNA workers' compensation report, Conservit's safety record is "at or better than the national average in all accident categories, which is attributed to the company's training program and enforcement of safety rules. In addition, the firm's 1991 disabling severity rate is about 115 of the national average and approximately 1/30 of where it was in 1988.

Employee turnover between 1985 and 1990 decreased by 27 percent. During the same period, sales per employee grew by 47 percent.

The level of decision-making by supervisors has increased. In addition, according to a survey conducted by Human Equations, supervisors and top managers say there is better interaction among the management team: Supervisors are no longer tearful about expressing dissenting views and management meetings are considered generally more productive. Supervisors also indicate there is better communication and more openness on the part of other employees. And while the word from the rest of the staff is mixed, most people feel the company's work atmosphere has improved.

The participation and personal development program has had a major impact on the life of at least one Conservit employee: Inspired by one of the training sessions, a supervisor who was functionally illiterate (a fact he had managed to keep hidden from others in the company) enrolled in an adult reading program.

While these points show that value-based management can motivate employees to work harder and smarter, achieving participatory ownership is a never-ending process. Developing new management patterns requires enormous effort that must compete with normal inertia, day-to-day business pressures, and the rigidity of old mind-sets. Nevertheless, while the company experiences ups and downs and constant deviations from the ideal management program, each step Conservit takes moves it closer toward common vision and shared success among all of the company's employee owners. •

At Conservit Inc., treating employees fairly means rewarding them with shares in the company and cash bonuses. Among the results: Employee turnover decreased 27 percent in five years.
Tags:
  • 1991
Categories:
  • Nov_Dec
  • Scrap Magazine

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