General Inquiries

ESOP and Bonuses

  • 1.  ESOP and Bonuses

    Posted 11-05-2019 15:46
    We recently became a 100% ESOP company.  As you can imagine, there are many new things to learn.  It is very exciting.  I have a question to present to the CFMA community.  For those of you who have experience in this, how would you change existing bonus programs?  There are aspects of the income statement and balance sheet that see significant changes.  Do you focus on earnings before ESOP transactions?  Some other KPI?  What are your thoughts?



    Randal Helm CPA, MBA, CCIFP
    Chief Financial Officer
    The Baker Group
    Ankeny IA
    (515) 299-4058

  • 2.  RE: ESOP and Bonuses

    Posted 11-06-2019 07:08
    We became a 100% ESOP in 2014 and yes, the balance sheet changes quite a bit. While it can be a challenge, depending on your particular situation as far as leverage, we have found that focusing on maintaining earnings at a certain level before ESOP expenses has worked for us. ESOP expenses are all pretty much a known factor from year to year until you get to the point where you are having to buy back stock on departing employees and the price has recovered significantly from your initial valuation. We did not change our bonus structure at all. I would be glad to give you what insight I can so feel free to call me if you have further questions.

    Keith Daniels
    Chief Financial Officer
    Energy Air Inc
    Orlando FL
    (407) 886-3729

  • 3.  RE: ESOP and Bonuses

    Posted 11-06-2019 08:56

    Randy –


    Great question. We work with a lot of ESOP clients, and are actually one ourselves. What I've typically seen is having bonuses based on EBITDA. For instance, it could be a percentage of EBITDA, or you could have an EBITDA target, say $1 million, and the percentage is based off the target.


    A quick example to demonstrate: your bonus program is 10%, based off an EBITDA target of $1 million. If EBITDA came in at 900,000, you would increase the percentage by %.01, so bonuses would be 9.9%. If EBITDA was $1.1 million, the bonus would be 10.1%.


    This incentivizes the bonus pool to truly think like owners, and not just employees, which aligns great with the ESOP structure.


    Hope that helps!


    Thank you,




    Corey McSweeney, CPA
    Katz, Sapper & Miller








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    202 West Berry Street, Suite 600
    Fort Wayne, IN 46802


  • 4.  RE: ESOP and Bonuses

    Posted 11-08-2019 18:35
    Hi Corey,
    Your post is very interesting.  Regarding the .01% math, that part confuses me a bit.  I'm assuming each $100,000 increment in EBITDA decreases the bonus by .01%.  So if the company only made $200,000 EBITDA for the year, then the bonus would still be 9.2% ($1M - $200k = $800k which equates to a reduction of 0.8%).  That bonus, based on a much lower EBITDA, is very comparable to the 10% bonus on a $1,000,000 EBITDA.  Or did I read your explanation incorrectly?  Thanks.

    Nathan Hathcock CPA, MBA
    Berghoff Design Group
    Scottsdale AZ
    (602) 577-3861

  • 5.  RE: ESOP and Bonuses

    Posted 11-06-2019 11:18
    My firm is a commercial building GC, 100% ESOP since 2008. I would recommend you join NCEO, National Center for Employee Ownership. They have good resources for employee owned businesses. Yes the composition of your balance sheet can change depending on the amount of leverage and the  structure of the purchase transaction. Initially we focused on earnings before the ESOP transaction, treating the ESOP transaction expenses as a psuedo tax since the company doesn't have a tax obligation. However, our results changed significantly when we began focusing on earnings after ESOP transaction, and pricing the ESOP transaction expenses into our work including a factor for labor burden. Regarding our bonus plan, in the beginning we assumed that everyone would love the ESOP and see it as a great benefit. Over time we have realized that people / employees like cash more than they like the idea of having a retirement fund. Part of the struggle with the ESOP is that the way the shares and value of the ESOP plan are shared, according to ERISA law is to allocate based on a pro-rata share of wages. Depending on the number of employees you have and the spread in wages, this can be rather flat. What we experienced is employees we would want to incentivize like PMs were within a % of ownership shares with administrative people. We have found better results when we added a bonus plan based on return on investment or net profit of PM for those employees we wish to incentivize.

    David Miller CCIFP, CRIS, CTP
    Cfo / Treasurer
    Jokake Construction Services, Inc.
    Phoenix AZ
    (602) 224-4573

  • 6.  RE: ESOP and Bonuses

    Posted 11-08-2019 18:36
    Dave - Thanks for your comments about what has worked and not worked for Jokake.  Very interesting.

    Nathan Hathcock CPA, MBA
    Berghoff Design Group
    Scottsdale AZ
    (602) 577-3861

  • 7.  RE: ESOP and Bonuses

    Posted 11-06-2019 12:01

    We basically left all bonus programs in place but we do a 2nd P&L that backs out all the ESOP costs (and adds back in any savings).  So we essentially recreate the P&L as what it would have looked like if we didn't do the ESOP at all.  Extra interest charges, insurance costs, TPA expenses, etc. are deducted out and savings from switching to the ESOP are added back in for our bonus calculations.


    John R. Newlon, CCIFP

    Chief Financial Officer

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