A Stake in the Outcome by Jack Stack

Author:Jack Stack [Stack, Jack]
Language: eng
Format: epub
ISBN: 978-0-385-50510-9
Publisher: Crown Publishing Group
Published: 2011-02-23T00:00:00+00:00

Sizing Up the Problem

That’s actually one advantage employee-owned companies have over single-owner businesses: There’s really no avoiding the issue. One way or another, it gets put on the table at a relatively early stage, whether you want it there or not.

I doubt, in fact, that anybody is happy to see it. By the time the problem is big enough to notice, it looks as scary as all get out, particularly if you’ve been sharing equity from the beginning and seen a significant increase in the value of your stock.

In our case, for example, there were 297 members of the ESOP by the end of our fourth year in business, and their average age was about 32. I knew that our stock value wouldn’t keep doubling every year, but even if it rose at a more modest rate of, say, 10 percent to 15 percent a year, the price would double every five to eight years. It wasn’t unreasonable to expect we could be looking at a stock price of $200—and a total ESOP liability of $64 million—by the time the bulk of our current employees were hitting retirement age of 60 in the vicinity of year 2015. Assuming normal attrition rates and the usual five-year buyout provision for ESOPs, that translated into an annual expense of about $15 million—just for our current employees.

And what about the people who owned stock directly in the company? After buying out McCoy, we still had 830,000 shares between us. At $8.46 per share, the liability to the original shareholders came to $7 million; at $15.60, the number was $13 million. If we had the same number of shares outstanding in 2015—and if we did, in fact, manage to hit a stock price of $200—the total would be $166 million, on top of the $64 million we owed to members of the ESOP.

Let me tell you, when you see those kinds of numbers, your knees start to quiver. The $100,000 in equity we started out with was peanuts by comparison. We could lose it, and we’d all survive. But owing millions of dollars to your fellow employees is another story, especially if you know the number could be in the tens of millions of dollars later on.

What’s more, you can’t forget about the company’s other needs. Looking into the future, I could see tremendous competition for cash. While we were buying shareholders out, people were still going to want machine tools. Inventories would be growing. Receivables would be rising. Somebody would ask for a new building. Somebody else would argue for acquiring another business. What if we decided to start a new subsidiary? How would we pay for developing new product lines? There was no end to the demands we were likely to face.

And what about replacing the people who would be leaving? Most of the major shareholders had told me they planned to retire in three to five years. Money aside, we didn’t have replacements for them. We hadn’t had time to develop our own talent, and so we’d have to look outside.

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