Episode Thirty: Let’s Chat… Exploring Your Account Value Part One

Episode Description

Every business model has nuances, and employee ownership is no exception.

Have you ever wondered how shares are allocated and what influences their value, or how to understand the value in your ESOP account?

In this episode, Chris Fredericks, CEO of Empowered Ventures, and Emily Bopp, chief of staff at Empowered Ventures, discuss the details of how shares are allocated, determining their value, and what a “benefit level” truly is.

We want you to walk away feeling empowered as an employee and equipped with an understanding of the “why” behind the world of ESOP.

In this episode, you’ll learn:

  • Understand how the number of shares in your ESOP account is decided and why it’s distributed over time.
  • Discover the concept of benefit level, which reflects the percentage of your compensation reflected in your ESOP account value.
  • Learn about the annual addition of shares and how they accumulate over the years.

Jump into the conversation:

[01:29] What influences account value?
[03:01] How shares are decided
[04:15] Distribution of shares
[06:47] What is a benefit level?
[13:28] Part 2 sneak peek

How to Listen or Watch

Listen below or wherever you listen to podcasts.

Watch below or @Empowered_Ventures on YouTube.

Read the full transcript here or below the following media links.


Episode Transcript

Chris Fredericks: Generally speaking, in employee ownership in general, and especially, we find at Empowered Ventures, that benefit level is pretty robust and quite impressive and is a key part of how we’re able to ultimately create life changing outcomes together. All of our employee owners is that benefit level is really meaningful, and over time, as you stay longer, it really can accumulate into something that’s pretty special.

Chris Fredericks: Welcome to Empowered Owners, the podcast that takes you inside Empowered Ventures. I’m your host, Chris Fredericks. In each episode, I’ll have a discussion with one of our employees to discover and highlight their distinct personalities, perspectives, and skills while also keeping you in the loop with exclusive news, updates on company performance, and a glimpse into the future plans of Empowered Ventures. This is an opportunity for me to learn more about our amazing employee owners and an opportunity for you to hear regularly from me and others from within Empowered Ventures. On this episode of empowered owners, Emily and I talk about some of the main drivers of our employee owners ESOP account balances, how shares are allocated, and what a benefit level is. We also preview part two of this topic, which will cover share price and EV’s valuation, which will be coming soon. Good morning, Emily. How are you today?

Emily Bopp: Good morning. I’m doing good. How are you doing?

Chris Fredericks: Great. Yeah. Excited for our talk today.

Emily Bopp: Yeah, here, too, because a lot of people, when they look at their retirement account, and I know I’ve felt this way in the past, whether it’s a 401K or whatever it is, if it’s invested, like, outside of your control, you’ve turned that over. You get these statements, and sometimes the big numbers get a lot bigger, and sometimes they get smaller. And when it’s going up, it’s tempting to think, oh, yay, the stock market must be happy, and you feel happy. And then when the number goes down, you’re like, oh, man, the sky is falling. But I think very few of us actually understand what influences that. Why is it going up? Why is it going down? And when you’re dealing with billions and billions of dollars in the publicly traded market, there’s probably a lot of factors that go into why. But when we’re talking about our ESOP account, maybe it can be a lot more simple or a lot more understandable to understand why is our share, our account value, increasing in value? Why would it maybe be staying the same? And what influences, ultimately how much our account value is. So I’m hoping that you can just help us understand what those influences are, since we’re just talking about our small family of businesses and not the whole stock market. At large.

Chris Fredericks: Yeah, that sounds great.

Emily Bopp: Okay, so to kick it off, I think we all know the number of shares that are allocated to us is one of the main elements that influences how much our account is worth. How is that decided? How do we get the number of shares that we get? What happens there?

Chris Fredericks: Yeah, and just to lay a little more groundwork on that. So once a year, all of our employee-owners receive a new statement. And that statement, one of the main numbers on it is how many shares you have in your account. And so a new employee starts, they join the ESOP shortly later, and then in their first year, their first statement, it’s going to say zero shares starting, and then an addition of shares for that new year. So that addition is going to be something that happens every year. So, every year there’s a new addition of shares starting from zero. So that’s one thing to start off with, just to kind of lay the groundwork, because I’ve definitely been asked many times in the past, does everyone get all their shares up front? I join, I become an employee-owner, I get all my shares. And that’s not how it works. It’s more of a situation where those shares are slowly, steadily added over time, once a year. So the longer someone stays, the more shares they will accumulate. As an employee owner at Empowered Ventures, I think that’s a really important starting point to understand how this process really works.

Emily Bopp: Yeah, thank you so much for that. And why is that? Why would we not just get all of our full ownership dumped in at the beginning? Why is it distributed over time?

Chris Fredericks: Yeah, because the ESOP program, for us and for ESOP companies in general, is really meant to be like a long-term benefit plan that’s going to benefit current and future employees. And so to do that, we need to make sure there’s always a fair amount of unallocated shares held in suspense, so to speak. And those shares then are going to be available for future employee-owners, including ourselves, going forward. And so, when our ESOP was established in 2010, we decided to allocate all the shares over a 25-year period. So that’s the starting point for understanding how all these shares end up in everyone’s accounts is. Here we are about 14 years later, 14 years into our 1st 25-year period, of allocating out all of the empowered venture shares over that period of time. Those shares then, on an annual basis, a certain amount of those, roughly 40,000 of that initial amount of shares annually, is spread out across that year’s employee base. So, whoever’s an employee-owner in that current year. For us, this current year, meaning March 31, 2024, is the year we’re about to finish. Employee owners at that point are going to receive a portion of that year’s shares.

Emily Bopp: That makes a ton of sense because you’ve got a pie, and you’re cutting out the pieces if you give it all away at the very beginning, like you’ve got nothing left to work with. And so, yeah, on the one hand, that makes a ton of sense, that we want to make sure we have enough pie for everybody for well into the future for a very long time. But as you were talking, the other thing I was thinking is that it also mirrors what real business ownership actually functions like. Because if you are an individual and you started your own company, you don’t benefit the future value of that company on day one. It takes time to build up the real value, and I’m certain that there’s just so much analysis and forecasting that goes into how to run an ESOP. I’m really thankful that you and our third party administrator and our trustee and that there are some best practices. This has been around since the 70s. There’s some best practices of how to do this so that we’re financially sound. But yeah, thanks for laying the groundwork there for just how shares are allocated and that our employee-owners can expect to see the number of shares in their account go up a little bit every year. So, okay, those shares are worth something. And now this is going to kick us off into the rest of today and then set the stage for part two of this discussion where we get into more of the nitty-gritty of how is it determined what those shares are worth? There’s a dollar value assigned to those shares, but I think you wanted to kick us off just by explaining something called benefit level today. What is a benefit level? And yeah, help me out.

Chris Fredericks: So something I would encourage everyone to do who receives shares on an annual basis, being an employee owner of Empowered Ventures, is to take a look at that number of shares you’re allocated and look at the value of those shares. And that’s going to be on the statement, too. So it’s going to show current year new shares times the share price, total value of additional kind of contribution to my account this year. Take that number and divide it by your total annual compensation, your W2 wages from the calendar year, let’s say from the ended during that period of time for this year, 2023. Take a look at those 2023 total wages. Divide that out and see what that is. So it’s going to be that contribution value divided by your total wages. That’s your benefit level. So essentially, that’s the percentage of your compensation that you are receiving on an annual basis in one year, in this one year for being an employee-owner of empowered ventures. So I think that’s a really important number because for us and for other companies, that’s kind of similar to a 401K match or a 401K profit share in terms of the type of benefit that it is. But generally speaking, in employee ownership in general, and especially, we find at empowered ventures, that benefit level is pretty robust and quite impressive and is a key part of how we’re able to ultimately create life-changing outcomes together. All of our employee-owners is that benefit level is really meaningful, and over time, as you stay longer, it really can accumulate into something that’s pretty special.

Emily Bopp: Okay, so a benefit level is the percentage of my compensation that is reflected in the account value that I have. Did I say that right?

Chris Fredericks: Yeah, it’s the annual level of benefit you’re receiving for that new contribution. And a key distinguishing thing here is ours is variable. So you can imagine that in maybe again, analogizing it to a 401k, some company might say we provide a 4% benefit level profit share into the 401K. So the company is then saying, okay, 4%, we fix that number, we multiply that times your total wages. That’s the benefit we’re going to contribute into your 401K. For us, we do not have a fixed benefit level. There’s no percentage that we are defining, and it’s actually driven by that number of shares. So we have a fixed number of shares that we allocate for everybody every year. And so those shares are spread out across our entire employee owner base, and then those shares have a value. So, the benefit level would be considered a variable benefit level because the shares and the stock price can change. Like the shares that we allocate actually grow over time, and that stock price changes annually, too. So, that creates a variable benefit level. Historically, we’ve actually trended pretty high. So let’s say 20% plus variable benefit level on an annual basis.

Emily Bopp: Wait a second, did you just say that a lot of people get 4% given to their 401K, and we’ve historically had some years as high as 20%?

Chris Fredericks: I would say we’ve even been much higher than 20 in a lot of years. We are targeting 15% to 20%, but we don’t control that today per se. We have to kind of manage that over the long term. And there’s mechanics involved there that allow us to manage it for the long term. But just know that the important thing is we are targeting 15 to 20. We have been running above that, and we may still run above that at times. But if a person wants to know, what should I expect going forward? Take that annual compensation times 15% to 20%. That’s what we’re shooting for as a new benefit contribution each year into the account.

Emily Bopp: That is so helpful. And my mind is going to all the math that happens behind the scenes to make all this happen. So if any of our evers are mathematically inclined, and you want to understand more of this, reach out to us, because we can definitely elucidate. But for the vast majority of folks to just understand that, okay, I am going to see an increase in the number of shares, my statement every year, and I’m going to see this thing called a benefit level, which is basically a percentage of how much I make. And that’s been running around 20%, maybe higher, but we’re targeting between 15 and 20%. That those are two major factors that influence what my account value is. That’s helpful. I can get my head around that.

Chris Fredericks: Yeah. And, of course, if any attorneys are listening, they’re going to say, hey, make sure you put a caveat out there, that none of this is guaranteed. This is all dependent on our share price staying at a strong level and growing. And our business is continuing to succeed. So no promises at all as to what this benefit will ultimately be in the future. But we know from our history that it’s been very reliable. And as long as we continue to perform, all of our companies continue to perform. We feel really confident that this 15% to 20% is very achievable going forward.

Emily Bopp: Absolutely. Which totally makes sense. Right? Because it’s, again, having this thinking like an owner, acting like an owner, and being benefited like an owner. No owner has a guarantee that their company is going to perform in the future the way that it did last year or is today. And so, yeah, it’s an awesome sense of responsibility and of just agency. Like, we can all contribute to keeping our ESOP healthy and strong and that benefit level high by keeping our companies as profitable as possible. And I love that. I love that we all get to feel a sense of ownership there. Well, thanks for diving into a couple of those things. So next time, in part two, we want to get into a little more of how our businesses are valued. So we’re just saying we’ve got to keep a company profitable. We’ve got to keep our family of businesses profitable. Who determines how profitable it is? I mean, we can say that we are X, Y or Z, wildly successful, but I’m sure, ultimately there has to be a very quantifiable factual evaluation. And in fact, the term is valuation. So, if I’m not mistaken, we’re going to dive into that in part two. Can you just tip us off where we headed?

Chris Fredericks: Perfect. Yeah. And I’m excited to do that because annually we release this share price, our share price, to our employee-owners. And that’s based on evaluation, which is what you’re referring to. And we celebrate that share price each year because it’s such a huge part of what drives the account value as well. It’s really two things. It’s shares, share price. So those two things we just talked about shares a lot. Share price is the other big piece, and I’m excited to dig into that.

Emily Bopp: Awesome. Thanks so much. I’m looking forward to catching this conversation for part two.

Chris Fredericks: Thanks, Emily. I hope you enjoyed that conversation. Thank you, Emily, for joining me and Share Your Genius for producing this episode. Remember, we want to hear from you. To reach us, send an email to [email protected]. Thanks for tuning in.

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