Dimco-Gray Co. is a rarity among the 10,000-or-so employee stock ownership plans created since 1974. First, 100 percent of the Centerville, Ohio, firm is owned by its 140 employees. Fewer than 15 percent of ESOPs fall into that category, according to experts at three ESOP trade associations: the National Center for Employee Ownership, ESOP Association and Northeast Ohio Employee Ownership Center.
John Logue, director of NOEOC, based at Kent State University in Kent, Ohio, said a 1992-1993 study showed 7 percent of Ohio ESOPs were 100 percent employee-owned, although that figure was expected to grow. About one-third are at least 50 percent employee-owned.
Second, saving the company was the prime motivation at Dimco-Gray. Most ESOPs are set up mainly for financial reasons, often by an owner who wants to sell the firm gradually and retire.
Indeed, tax breaks provide a powerful incentive to consider selling to employees, according to ESOP advocates.
``The vast majority of ESOPs are done as a business strategy, an exit strategy by the owners,'' said Michael Keeling, ESOP Association executive officer.
Often, the owner remains with the company and maintains operating control after selling a partial interest.
What is an ESOP? NCEO describes an ESOP as a trust fund set up as a deferred benefit plan for employees. A company can fund an ESOP in two ways: by contributing either its own stock or cash to buy stock (called a nonleveraged plan) or by borrowing money to buy stock (a leveraged plan). Corporate contributions to the plan can be deducted from the company's taxable income.
If the ESOP buys 30 percent or more of the company and the owner rolls the money over into stocks or bonds of U.S. companies, the owner can defer capital gains taxes until those stocks are sold.
When borrowing money through an ESOP, usually to buy out an owner or for capital investment, loan payments are treated as tax deductible contributions. The interest and principal both are considered contributions to an employee benefit plan and, therefore, are tax deductible.
For private companies theESOP selling price is determined by an independent property valuation, based on the market price.
Employees receive shares through vesting. They do not cash in their stock until they re-tire or leave the firm, when the company is required to buy back the stock. A company may give employees full voting rights, but it is only required to let them vote on major decisions such as mergers, acquisitions or the sale of corporate assets.
What makes a firm a good ESOP candidate? According to NCEO, the firm should be large enough to make the costs of the plan worthwhile. The firm also should be making a profit, since tax deductions have no value if there is no taxable income.
Estimates vary on costs to set up an ESOP. NCEO said legal, accounting and consulting fees can total $15,000-$25,000 or more. But that figure is way too low, according to Norman Brennan, Dimco-Gray's president, chief executive officer and chairman.
Although tax breaks and retirement planning may be the main reasons for ESOPs, more executives are learning what Dimco-Gray knows, that employee ownership can be a powerful way to involve workers, said Corey Rosen, NCEO executive director.
``This has been a major change in the ESOP community over the past decade,'' he said.
Dimco-Gray offers another important lesson - that an ESOP can be difficult.
``ESOPs take a tremendous amount of education,'' Brennan said. ``They're confusing to people because they don't know what their roles are.''
Brennan has become an ESOP activist. He is a director at two Ohio ESOPs: Textileather Corp. of Toledo, which makes vinyl for the automotive industry; and Bliss-Salem Inc., a Salem steel products maker.
Brennan will lead a session at the ESOP Association's conference May 17-19 in Washington called ``Strange Bedfellows? ESOPs and Unions as Partners.''
National Center for Employee Ownership, 1201 Martin Luther King Jr. Way, Oakland, Calif. 94612; tel. (510) 272-9461.
ESOP Association, 1726 M St. N.W., Suite 501, Washington, D.C. 20032; tel. (202) 293-2971.
Northeast Ohio Employee Ownership Center, 309 Franklin Hall, Kent State University, Kent, Ohio 44242; tel. (216) 672-3028.