Executive Summary

This ESOP's No Fable

William Ellis
President & CEO of Piper Jaffray Companies

May 1994

In which of the following countries are workers most likely to have a substantial ownership stake in their companies: a) Russia, b) France, c) China, d) United States? Surprisingly, perhaps, it is the unabashedly capitalist nation, the United States, in which employees hold the largest direct stake in the companies in which they work.

In their 1991 book, The New Owners, Rutgers University professors, Joseph Blasi and Doug Kruse identified 1,000 publicly traded companies in which employees owned an average of 12 percent of the stock. These companies made up 29 percent of the market value, 27 percent of the sales, and 20 percent of the jobs in the non-government economy of the United States.

By tracking performance measures--return on assets, return on equity, price-to-earnings ratio and profitability--the Rutgers professors found that organizations with a high degree of employee ownership consistently came out on top. As a group, these 1,000 companies have significantly out-performed the broader market as measured by both the Dow Jones Industrial Average and the Standard & Poor's 500.

At Piper Jaffray, we have long recognized that the employee owner is a more motivated worker, an especially important consideration in a service industry such as ours. The good will earned by the courtesy and professionalism of our people is of immeasurable value in the communities where we have offices. We want employees to understand that their success and that of our company are closely linked. Stock ownership provides dramatic evidence of that linkage.

We have even taken the position that, if owning a little bit of stock is good, owning a lot is considerably better. Our company's employee stock ownership plan (ESOP) currently holds about 40 percent of the company's outstanding shares. Company insiders, including support staff, control an additional 18 percent through direct ownership. Many of our employees--and not just the highly-compensated ones--have retired from Piper with ESOP savings in excess of $100,000.

The benefits to the company have been substantial. In a recent survey conducted by the Securities Industry Association, Piper Jaffray posted a turnover rate among our investment executives of less than half the industry average. Since it costs approximately $50,000 in the first year alone to train a new broker, reducing our turnover is an important priority.

Because their financial stake is so large, employees tend to be much more aware of the company's performance on a day-to-day basis. Ultimately, this affects every aspect of the business, from customer relations to expense control.

In addition to linking the efforts of the individual to the success of the enterprise. the ESOP provides a clear expression of how the firm values its employees.

There is nothing magical about the ESOP structure. Its success as a tool for building corporate culture depends on a number of factors, including the motivation of the company in setting up the plan, the level of contributions, and the size of an individual's overall net worth represented by his or her shares in the ESOP. Marginal holdings and marginal contributions will almost certainly produce marginal results. But when an ESOP holds securities whose value appreciates over time as workers add value to the enterprise, it's a winning arrangement for all concerned.

The ESOP has become an integral part of our corporate culture. It has provided both the motivation to succeed and a vehicle for everyone at Piper Jaffray to share in the company's success.

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