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ON THE ROAD TO
JUSTICE-BASED MANAGEMENT ALLIED PLYWOOD CORPORATION |
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Allied Plywood Corporation, a 100% employee-owned company headquartered in Alexandria, Virginia, can sum up the secret of its phenomenal success in a single sentence: "Working together to give customers the highest quality service." But what makes this phrase real for Allied's customers and employees, and more than just empty advertising, is Allied Plywood's incentive system, today widely acknowledged as a model of Ownership Sharing. Underlying its unique incentive system is a value-based philosophy and management system called the "Allied Way." Primarily a wholesale distributor of wood and related products, Allied Plywood was founded in 1951 in Ohio by Ed and Phyllis Sanders, a husband-and-wife team who moved their business to Virginia in 1956. Allied Plywood's business includes selling softwood plywood, hardwood plywood, interior paneling, particle boards, Styrofoam sheathing insulation, kitchen laminates, ceiling tiles, adhesives, cabinet hardware, kitchen cabinets, solid surfaces, and a limited amount of hardwood lumber. Their market is primarily new home builders, remodelers, cabinet makers and sign shops, from Baltimore, Maryland to Atlanta, Georgia. To survive in the highly competitive Washington market, the Sanders immediately began sharing profits with employees through a highly motivational monthly and year-end cash bonus system. On September 30, 1977, the company adopted its Employee Stock Ownership Plan (ESOP) as an added ownership sharing benefit. This provided a gradual means for employees to take over the company as the Sanders prepared for retirement. At that time, the Sanders owned 2,920 or 83% of the 3,512 outstanding shares of the company, with the balance held by 8 employees and the company's legal counsel. For each of the next 5 years, the Sanders sold some of their shares to employees through the ESOP, financing the purchases with cash contributed by the company from profits. On July 1, 1982, the Sanders sold their remaining control block of shares to employees through a "leveraged" ESOP, which borrowed the funds from a local bank. Within 20 months the buyout loan was repaid in full. Today, Allied Plywood is a 100% employee-owned company with 99% of its shares held in an ESOP trust for the benefit of employees. Since the ESOP was adopted, the workforce increased from nineteen (including the two owners) to over 194 employees in September, 1997. After the employees took control, the company expanded from its one Alexandria warehouse to sixteen locations in four states stretching from Frederick, Maryland to Marietta, Georgia. From $6 million in sales in 1977 and $6.2 million in the slump year of 1982 when the employees took over, volume has increased to gross sales of $66.5 million in 1997, representing a compound rate of growth of 17.1% over the 15 years following the employee buyout. Productivity as measured in sales per full-time employee is impressive, close to $350,000 in 1997. This record was achieved despite a major slowdown in the home building industry and the normal productivity declines associated with opening up new facilities. Even in 1990, a year of severe recession in the housing industry, productivity was over 17% higher than before the ESOP. Fixed wages are relatively modest compared to those of the company's competitors, but they are only a fraction of total compensation for people working at Allied. For example, variable pay supplements through Ownership Sharing (monthly and annual bonuses plus ESOP benefits) have ranged from a low of 34% to over 300% more than annual fixed pay over the first 20 years of the ESOP. This "cushion" has helped to spread the pain of lean years, so that the pressure for layoffs is radically less than for most U.S. employers. Thus, the Allied team can keep the "family of workers" employed during hard times in the U.S. economy. Substantial discretionary year-end bonuses have been paid almost every year, based on the value of each individual's contribution to the company. Employees generally receive an additional 10% to 25% above their total fixed and variable income in the form of tax-deferred ESOP benefits. Variable compensation (i.e., risk-sharing) has ranged from 25% to 77% of total compensation, while fixed pay, normally the greatest proportion of pay for most workers, has been as low as 23% of what Allied workers received as compensation and benefits. This adds flexibility and job security within Allied Plywood, far greater than with its competitors. Management estimates productivity (sales per employee) to be significantly higher that of the competition. Total cash compensation for Allied drivers and warehousemen in good years is about twice that of non-union drivers, and over a third more than unionized drivers in competing companies. Employer contributions toward retirement benefits for employees of competing companies range from 0% to 15% of annual cash compensation, compared to 10% to 25% through Allied's ESOP. Allied Plywood's return on investment (ROI), a basic measure of financial efficiency, has varied from a low of 42% to a high of 86.7% since the ESOP was established. Because the company deliberately pays out most of its profits to its employees in the form of Ownership Sharing benefits, these profits are added back in determining the "true" after-tax ROI for comparison with traditionally-owned companies, where a ROI of 20% is considered excellent. Since 1982, policy has been controlled by a 5-person board of directors who also serve as the trustees of the ESOP trust, the legal owner of over 99% of the company's voting shares. In December 1997, 30 employee representatives, including the top executives, came together for three and one-half days in a highly structured "Syntegration" retreat facilitated by a team based in Ontario, Canada. Among other major decisions, they agreed by consensus to restructure the board, with three members to be nominated by a broadly-representative Ownership Council and elected on a one-share, one-vote basis by the non-management employees, and three to be nominated by a Management Council and elected on a one-share, one-vote basis by the executives. Those six board members will nominate and elect three "outside" directors to offer a balanced perspective on the board. Day-to-day executive decisions (including hiring and firing, basic compensation and discretionary year-end bonuses) are made by the President and Secretary-Treasurer, with frequent meetings of the Management Council consisting of key management executives and the top manager of each warehouse/profit center. Major investment decisions are implemented only after consultations with all employees. As a result of the Syntegration retreat, an Ownership Council was established as a "grassroots" advisory body to the board. Corporate governance remains generally informal and open, with responsibility widely dispersed at the workplace. Allied operates on the basis of two-way accountability. Employees are accountable to their immediate supervisors for the quality of their work. These evaluations count heavily in year-end discretionary bonuses and promotions. Ultimately, the company as a whole is accountable to the customers. Allied's "Goals" Program allows each employee to measure on a monthly basis how successfully the customers are being served. Monthly bonus checks linked directly to 20% of a profit center's monthly profits give immediate feedback to each employee on the financial ups-and-downs of his profit center. (A decision was made in 1998 to reduce this percentage from 30% in order to increase funds available for annual distributions and to bring fixed compensation levels closer to market wage rates.) "Goals" for determining these checks are posted daily once sales exceed the break-even point for the month. This monthly financial accountability system is reinforced by periodic group meetings, annual bonuses, and individualized ESOP statements reflecting changes in the appraised value of each share and each person's share of annual contributions and total accumulations. All employees who have been on the Allied payroll since the ESOP was installed have accumulated accounts close to or exceeding $100,000. At some point, dividends may be paid on each employee's equity stake to reinforce Allied's Ownership Sharing philosophy. Each person receives an ESOP handbook when he or she first joins the company.
The ESOP is the key to Allied's governance and two-way accountability system, and serves to perpetuate Allied's ownership culture. Allied's monthly profit sharing provides short-term feedback to each employee based on the performance of his immediate profit center. The year-end bonus gives feedback on each worker's personal performance and the company as a whole. The ESOP gives long-term feedback reflected in the value of company shares and the value of the worker's overall asset accumulations. All full-time employees become eligible to participate in the ESOP from the day they are hired. However, they must be on the September 30 payroll to receive an allocation of that year's ESOP benefits. Benefits are in the form of new corporate shares, or shares that the company contributes from treasury. Cash contributions are also made, in order to purchase shares from departing participants, or to repay lenders when large blocks of shares are purchased on credit. Employees pay nothing for their shares. Allied's goal is to contribute an amount equal to 25% of total compensation of all covered employees, the maximum contribution allowed by U.S. law. Each year's employer contributions and forfeitures are allocated to participants' ESOP accounts according to each one's percentage of total compensation from regular pay, overtime, and monthly and annual bonuses. Vesting (or non-forfeitability) is designed to reward long-term service and loyalty to the company. ESOP accounts of those who quit or are fired before three years of service are 0% vested, meaning that when they leave, they forfeit all their accumulated ESOP benefits. Forfeitures of the non-vested part of a departed employee's ESOP account are re-allocated to remaining employees along with new contributions. Upon three years of service, vesting begins at 20%, with 20% added each following year. In year seven, an employee's account becomes 100% vested and is no longer subject to any forfeitures. Those who reach retirement age, become disabled, or die become 100% vested automatically. Vested shares are not distributed to employees until they leave the company. Generally, there is a five-year waiting period for those who quit or are fired. Distributions are made sooner in the event of retirement, disability or death. Normally, the company or the ESOP repurchases the shares of departing employees for cash at the appraised fair market value. A portion of the company's cash contributions are invested outside the company in order to build up a diversified pool of assets, providing ready cash for meeting the ESOP's projected share repurchase requirements. Employees pay no personal income taxes on their ESOP benefits as long as their shares remain sheltered by the ESOP trust. Taxes must be paid when cash or shares are distributed to departing employees, unless the distribution is "rolled over" (immediately reinvested) into another qualified retirement plan. A key result of Allied's unique ownership sharing and incentive system is that Allied employees are generally more opportunity-oriented (entrepreneurial) and less security-oriented than workers in other companies. Thus, fixed labor costs have remained somewhat lower than Allied's competitors, with profit sharing rewards serving to cushion pressures for "layoffs or bankruptcy" during lean months or recessions. It is true that Allied's flexible reward system is more risky and requires more personal financial self-discipline. But Allied's risk-and-reward system also creates more of a team spirit, where all members of the team mutually share hardships and responsibilities, as well as the benefits of working for themselves. Thus, everyone who works at Allied Plywood is disciplined by his own self-interest as well as the mutual interest of all Allied's worker-owners. As such, Allied is a case study of a team of entrepreneurs, working together to better serve their customers. |
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| ADDITIONAL SOURCES ON JUSTICE-BASED MANAGEMENT(SM)
For more information on Justice-Based Management(SM) and building an ownership culture, contact Equity Expansion International, Inc. at P.O. Box 40711, Washington, D.C. 20016, (Tel) 703-243-5155, (Fax) 703-243-5935, (Eml) info@eei-consultants.com, (Web) http://www.eei-consultants.com. Also see:
Various publications of the Ohio Employee Ownership Center, Dept. of Political Science, Kent State University, Kent, Ohio 44242, (Tel) 330-672-3028, (Fax) 330-672-4063, (Eml) oeoc@phoenix.kent.edu. Various publications of the Beyster Institute (formerly the Foundation for Enterprise Development), 2020 K Street, NW, Suite 400, Washington, D.C. 20036, (Tel) 202-530-8920, (Fax) 202-530-5702, (Eml) dbinns@fed.org, (Web) http://www.fed.org. |
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P.O. Box 40711, Washington, D.C. 20016 - Phone: 703-243-5155, Fax: 703-243-5935 thirdway@cesj.org (e-mail) |
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