Piece of the action

Randy Peterson is more than a driver and employee at Eastern Oregon Fast Freight. He is an owner. Not the owner, but one of them, as are other employees with at least three years’ tenure.

In 1993, Ken Booze, then president of Eastern Oregon Fast Freight, Inc. (EOFF), an LTL carrier in Portland, Ore., set aside 38 percent of his company’s assets into an employee stock ownership plan (ESOP). Booze thought the ESOP would foster unity and cooperation by having employees share the risks of ownership. After his untimely death in 1999, Ken’s brother John Booze became president. John and Ken had worked together and started the ESOP.

“The reason we started thinking about the ESOP was because we had many different terminals,” Booze says. “We had a hard time governing them all. We thought if there was more involvement – more people working for a goal – it would help in outlining areas without direct supervision.”

An ESOP is more complex and expensive than other benefit plans, but the results have met Booze’s expectations. Turnover is virtually zero once employees hit the three-year mark. The company’s corporate and terminal offices are fun and positive work environments. And, because employees have a stake in the company’s ownership, they expect performance from themselves and others, says Kevin Iven, the Portland terminal manager and director of human resources.

Retention benefits
To many owners, an ESOP might seem like a bad deal – you give up your equity to provide a benefit that employees might not fully appreciate. Booze, however, views his ESOP as his most important investment – an investment in his human assets.

“You’ve got to invest for the future,” Booze says. “A company is only as good as its employees. Employees have to see a future in their work.”

EOFF’s employees are eligible to participate in the plan on January 1, following their date of hire, and must work at least 1,000 hours or more during the year. Annual contributions are allocated to ESOP participants in proportion to each employee’s yearly earnings, compared with the earnings of all other employees in the ESOP; that is, their pay is divided by the total pay of all participants. This amount is then multiplied by the amount of stock to be allocated that year to ESOP participants, says John Magliana, an attorney in Portland, Ore., who specializes in ESOPs and helped develop the EOFF plan.

Each year, EOFF allocates stock to its employees based on the amount the company paid that year on the loan the ESOP took out when the Booze brothers sold 38 percent of the company’s stock to the ESOP. Like EOFF, most companies take out loans when setting up an ESOP, Magliana says.

Because the stock owned by most ESOPs is not publicly traded (i.e., there is no market for it), Congress has provided employees with a “put option.” An employer must repurchase the stock at its fair market value during one of two “put option” periods. The first is the 60-day period following the person’s receipt of his or her stock distribution and the second is the 60-day period after the issuance of the stock valuation for the following plan year.

EOFF employees must continue employment with EOFF in order to “own” any stock in the ESOP – that is, they do not even start vesting in their stock accounts until after three years’ employment. After three years, an account becomes 20 percent vested. The account continues to vest 20 percent each year and is fully vested after seven years and beyond. Thus, when EOFF employees are entitled to a distribution from the ESOP, they only receive the vested portion of their stock accounts, which they can sell to the company for cash to retire, or for any other purpose. Unvested portions are forfeited and allocated to the other participants who remain employed at EOFF.

EOFF owner John Booze (above) developed the employee stock ownership plan with his late brother, Ken, as a way to motivate employees and foster cooperation at the carrier’s many terminals.

Despite the lure of employee ownership, some employees are only concerned with benefits that show up on their paycheck. The problem is more widespread among drivers, Iven says. Getting employees to catch the vision of belonging to an “employee-owned” company is not always easy.

“It’s tough because it’s not cash,” Iven says. “People want cash now. They are looking for short-term greener grass.” Because the ESOP is not a simple concept, like a paid vacation or dental insurance, it can be a tough sale. “You have to be a financial person to understand it,” Iven says. “It is complex to calculate, and there are many rules to follow.”

A simple, yet effective way to sell the “employee owned” concept is with publicity. “EOFF, an employee owned company,” appears on t-shirts, signs and letterheads, and the notion is discussed frequently in meetings. Iven is also working on developing a company newsletter and password-protected account statements on the company’s website. The key, Iven says, is to create an impression – and simple understanding – of how one employee’s actions affect the others in the company.

“We tell employees the ESOP is geared to making our company stronger,” Iven says. “We stress that they take care of the equipment and drive safely. We tell them ‘it’s your company now.'” Iven also seeks to create an environment where all employees apply positive peer pressure. With employee ownership, when an accident happens, it becomes everybody’s problem.

While EOFF spends quite a bit of time promoting the ESOP, it spends very little time administering it. As a requirement, a third party appraises its business during the first quarter of each year. All other administrative duties, such as issuing stock certificates and preparing account statements, are handled by a third-party “plan administrator.”

Eastern Oregon Fast Freight
Location: Portland, Oregon
Principal: John Booze
Equipment: 125 Ford, Freightliner, Sterling, Volvo and International day cabs; 28-foot pup van trailers; Eaton 9-speed transmissions; Detroit 60 series engines.
Freight: General commodities with an emphasis on time-sensitive freight.
Challenge: Governing employees at 22 different terminals; encouraging ingenuity and achieving company goals.
Solution: Creating an employee stock ownership plan and promoting it.

Increasing market share
As a regional LTL carrier, EOFF has 22 terminals throughout Washington, Oregon and Idaho. The saturation of terminals enables the company to offer diverse services, from overnight delivery to just-in-time shipments for manufacturers, Iven says. Some of the biggest accounts are large interstate carriers that partner with EOFF to deliver freight to rural communities. The carrier hauls general commodities with a focus on time-sensitive freight.

EOFF has increased its market share of LTL freight by sweeping up the wreckage of bankrupt carriers. Just in the past two years, the company bought several new terminals in Washington and Oregon from carriers that were moving out. The company now has 22 terminals and averages about 15 employees at each location. Its largest terminals, in Portland and Seattle, have 144 and 45 people, respectively. After several consecutive years of substantial capital growth, Booze says it’s time to build up other areas, such as management and sales.

“We have been very fortunate,” Booze says. “But we’re done growing for now. We have to get caught up with our expansion. We have things we have to grow into.” With an ESOP that encourages individual ingenuity and responsibility, Booze has some eager volunteers to help shape the company. There was a price he had to pay – 38 percent of the company’s ownership – but to him it is an investment with great returns, not all of which have been realized yet.

“If we were sold, the new owner can buy the ESOP out at the same time. If I personally want to sell, the ESOP can buy me out too. It is a huge advantage,” Booze says.

All things considered
John Magliana, an expert of employee stock option plans (ESOP), based in Portland, Ore., is counsel for Eastern Oregon Fast Freight (EOFF). Although EOFF implemented its ESOP to motivate employees, Magliana says carriers also choose ESOPs for the following reasons, among others.

Tax free treatment. If an owner sells at least 30 percent of his stock to the ESOP, he will generally not have to pay taxes on the gain from the sale, if the seller reinvests the proceeds in the debt or stock of other publicly traded or privately held U.S. “operating companies.”

Economic incentive. “You get employees to participate in and understand the risks of the business – in the good times and the poor times,” Magliana says. With a direct incentive, employees offer constructive suggestions to make the company more efficient.

Diversify their assets. An ESOP allows the owner to convert a chunk of his business into cash by selling it. The owner can then reduce his financial risk by investing this cash into a diversified mix of stocks and bonds.

These benefits may sound appealing, but the psychological factor of giving up ownership in your company may outweigh the benefits.

“There is a lot of misinformation out there about ESOPs,” Magliana says. “You hear about all the good things and the tremendous tax benefits, but until you go through a feasibility study and struggle with the positive and negative aspects of an ESOP, you will not know whether an ESOP will be suitable for your company.”

Several organizations offer more information on ESOPs and on locating ESOP professionals:

National Center for Employee Ownership www.nceo.org
The ESOP Association www.the-esop-emplowner.org
Foundation for Enterprise Development www.fed.org