5/21/12. Why the Craft Beer Industry? Employee Ownership and Craft Beer: A Perfect Pairing

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1 + Employee Ownership and Craft Beer: A Perfect Pairing Why the Craft Beer Industry? INDEPENDENCE Owners near retirement who want to maintain the integrity and independence of their businesses GROWTH POTENTIAL An increased following, growing excitement, and an industry-wide interest in a collective increase in market share INDUSTRY CULTURE Educated, socially-conscious consumers; passionate employees; and innovation-driven products Succession Planning with Employee Stock Ownership Plans (ESOPs) The Building Blocks of an Ownership Culture Financial Benefits Owners can defer capital gains taxes Company can use pre-tax future earnings to fund the ESOP Flexibility Owners can determine their role with the company moving forward Rewarding Employees Protects jobs Provides a significant retirement benefit Integrity Ensures the brewery will continue to operate independently and maintain the same quality and vision. Ownership Understanding Information Sharing A Shared Ownership Stake Short-Term Incentives Entrepreneurship Training Employee Involvement 1

2 building an ownership culture with people who act and think like owners the secret make it the way you live and build community around it always sweat the small stuff rely on participative decisions & the power of collective wisdom high involvement culture connect people to the vision be transparent open book management participative decision making and involvement investments in technology collaboration sharing in the risks and rewards hiring skills or fit training events strategy culture compensation sweat the small stuff- every action sends a message never under estimate the power of role models think of every action in terms of the message you want to send o examples dress code? office areas? break room supplies? 2

3 never say we ve always done it this way - know your roots and decide what you can change and what must say the same (values vs. rules) In the Next 20 Minutes, You will: Understand the potential of equity as a currency; Discover the differences (and overlap) between equity compensation and employee ownership; and Take a quick trip through the universe of techniques to get there Employee Ownership so Important Because: Capital Ownership is the only key to wealth Employee-Ownership in the U.S.: A History Lesson for the Future A very high percentage of the population will not be in a position to acquire any material amount of capital ownership without some sort of intervention In general, tax and other laws encourage equity compensation of employees Broadening Capitalism to be more inclusive creates economic health at all levels Employee Ownership has a very strong, positive relationship with corporate performance 1920's 1950's 1974 Today First Modern Employee-Owners Louis Kelso Russell Long and ERISA 11,000+ ESOPs Millions of Employee-Owners and $950 Billion in Assets 3

4 The Currency of Equity On The Nature of Ownership Tactical: Tax and Cash Benefits Strategic: Engaged Employees Statement of Values: Ownership Culture Ownership includes two equal parts: Equity/Value Governance/Control Employee ownership can be structured to include either or both You design it to meet objectives. Compensation Substitute Key Executive Compensation Broad Based Equity Incentives Profit Sharing Stock Bonus Plans Gain Sharing Value Plans Employee Ownership The Basic Tool Kit: Equity Compensation: Stock Options Restricted Stock Synthetic Equity Performance Units Employee Ownership Worker Cooperative Broad Based Stock Options Employee Stock Ownership Plan Three Types of Employee Ownership Plans: Cooperative or Collective Ownership Qualified Plans offer Corporations and Employees significant tax benefits An Employer Sponsored Plan that is not a Qualified Plan is a Non-Qualified Plan and Much Simpler to Operate. 4

5 The Co-operative Model Primary Locus of Power (Governance) Factor of Production (Resource/Tool) Direct Ownership Stock Plans: - Stock Bonuses - Gifts of Stock - Tax implications For Co. and Participant Conventional Companies CAPITAL LABOR Co-operatives LABOR CAPITAL - Restricted Stock Bonuses - Transfer Restrictions - Forfeitability - Tax Impact - Valuation Techniques - Section 83(b) election - Stock Purchase Programs - IRC Section 423 Requirements - Securities Law Concerns - Exemptions for Limited Stock Offerings Indirect Ownership Tools: Stock Option Plans Incentive Stock Options (ISOs) Non-statutory Stock Options (NSOs) Synthetic Equity Phantom Stock Stock Appreciation Rights Qualified Stock Plans: Qualified Plans come in two varieties: Defined Contribution Plans in which the benefits are determined with reference to whatever has been contributed to the plan while an employee is participating, and Defined Benefit Plans (also often called pension plans) in which the benefits are specified in advance and contributions are calculated to arrive at the specified benefit level at a specified time in the future. The major difference is the holder of risk: Defined Contribution Plans settle the risk on participants, and Defined Benefit Plans settle the risk on employers. 5

6 Company Stock in Qualified Plans Type of Arrangement Profit Sharing Plan with Employer Securities as An Investment ESOP or Stock Bonus Plan Structure Any eligible individual account plan can be written to include company stock as an investment option within the plan. Deferrals, match, profit sharing or any combination may be invested in company stock as determined by the Trust Agreement. Specific ESOP tax benefits are generally not available since this approach does not generally include an ESOP. A Defined contribution Plan specifically qualified as an ESOP (designed to be invested primarily in employer securities) or Stock Bonus Plan (designed to allow for distribution of benefits in the form of Co. Stock) The ESOP Ownership Model Company Contributes Cash or Stock Funding Retirement with Company Stock Can Create Tax Funded Redemptions, or Tax Deductions with No Cash Outlay Liquidity or New Capital Company Stock Shareholders Or Company Coordination of separate ESOP and 401(k) Plan KSOP Separate plans generally. The ESOP design may include a dividend pass-through provision. Section 404(k) dividend deductions may be available available within the ESOP feature. Fully Integrated ESOP with 401(k) plan features Qualified Trust Eligible Employees Leveraged ESOP Leveraged ESOP Transaction Structure Employees Wealth Grows as Debt is Repaid $ Term Loan Repayment Company Typical Term Loan (1) Lender Allocation of Shares ESOP Stock $ ESOP Loan Repayment $ Contributions and Dividends May Be Longer or Shorter Term (2) Suspense Account ESOP Trust (3b) Shares Shareholders Participant Accounts Year

7 Benefit for Companies Now ESOP Contributions are Fully Tax- Deductible (Subject to Limits) No Matter How they are Applied Benefits for the Sellers Deferral of Tax on Sale Reinvestment in Diversified Portfolio Pre-tax funding of Business Succession Benefits for Employee Owned Corporations Does All This Work? Of over 100 studies done to date, the result is overwhelmingly positive. Equity sharing works! NCEO Studies Show that EO companies grow faster and are much less likely to go out of business. TEA Surveys of ESOP Companies Show that they have much more loyal and productive employees than others. Fully Tax Free Earnings National Bureau for Economic Research Studies Show that Employee Owners have on average 3.5 times the retirement savings of other. 7

8 A More Engaged Employee-Base Understanding Ownership At companies with a strong ownership culture, At companies with a strong ownership culture, 90% of employees care about meeting the customer s needs. 89% actively contribute to group problem-solving efforts. 96% are willing to do extra work to get the job done when the company needs it. 83% of employees responded that ownership is important to them. 84% recognize that the company s future performance will affect their financial security. 76% understand employee ownership and how it works at their company. This data is from employee surveys conducted by the National Center for Employee Ownership and Ownership Associates of over 6,000 employees at over 40 companies. This data is from employee surveys conducted by the National Center for Employee Ownership and Ownership Associates of over 10,000 employees at over 60 companies. Employee Ownership as an Engagement Tool For a more productive and engaged employee base. Employee satisfaction at companies with a culture of ownership is almost 20% higher than the national average.* 45% 63% The national average is based on a 2010 survey of 5,000 U.S. households conducted for The Conference Board. The ownership culture data is from employee surveys conducted by the National Center for Employee Ownership and Ownership Associates of over 5,800 employees at over 30 companies. The Ownership Edge According to numerous studies, companies that combine a financially significant ownership stake with an ownership culture have a distinct advantage in the marketplace. Employee-owned companies with a strong ownership culture perform between 8% to 11% better than they would be expected to otherwise. 8

9 Contact Information Camille Kerr Research Director Anthony I. Mathews Beyster Institute at the Rady School of Management University of California, San Diego 1241 Cave Street La Jolla, CA (858)