More Worker-Owners

WELCOME TO SOUTH BEND LATHE AMERICA'S LARGEST 100 PERCENT EMPLOYEE OWNED COMPANY. So reads the proud sign in front of a sprawling red brick factory in South Bend, Ind. Little more than a year ago, the 70-year-old machine-tool maker faced liquidation because its performance was not up to the expectations of its owners, Amsted Industries Inc., a Chicago-based conglomerate. But South Bend was a solid company with good years ahead of it, thought some of its top executives. They went shopping for a way to buy the company and pump in enough working capital to keep it going until times got better. Today South Bend is doing well and is totally independent, with most of its stock already deposited in a trust in which each of the company's 440 employees share, according to salary and seniority. SBL's turn-around probably owes much to the U.S. economic recovery, which has sharply driven up orders for machine-tool producers. But the company might not exist at all were it not for a financial device called ESOP, or Employee Stock Ownership Plan.

ESOP is no fable. The device is becoming increasingly popular as a way for companies to raise needed capital and give employees a stake in the business. As in the case of South Bend Lathe, an ESOP can help a basically sound business to keep going when it would otherwise be sold off or closed down. But its use is not limited to such last-chance situations. According to the Internal Revenue Service, more than 250 firms now operate some form of ESOP program, including such corporate successes as Hallmark Cards of Kansas City, Mo.; Gamble-Skogmo, a Minneapolis-based retailer with 18,000 employees; E-Systems, Inc., a Dallas defense contractor; and Houston's Zapata Corp.

Tax Break. The main attraction is that an ESOP gives a company a huge tax break. The mechanism: an employee trust is set up, borrows money and uses it to buy newly issued stock from the company. Then the company makes contributions to the trust that are used to repay the loan; they are contributions to an employee benefit plan and are tax deductible. Had the company borrowed the money directly, it would be able to deduct only the interest as a business expense. When the money goes through ESOP, the company can in effect deduct principal repayments too, thus cutting borrowing costs by as much as half.

Even that is not all. In recent years Russell B. Long, the conservative but populist chairman of the Senate Finance Committee, has become an evangelical disciple of Louis O. Kelso, a San Francisco attorney who has long championed various forms of "worker capitalism." In 1974 and 1975, Long pushed through legislation increasing the 10% investment-tax credit that a company gets for purchases of new equipment to 11 % --provided that the extra 1% is used to pay for company stock distributed to employees through an ESOP. This year Long pushed further; that 1% special credit (which is directly subtracted from the tax a company owes) has increased to 1 1/2% in the tax-reform bill that Congress passed last month (TIME, Sept. 20).

The extra half-point, however, is available only if employees dig into their own pockets and invest a matching amount in the company's stock. American Telephone and Telegraph Co., which has more than 770,000 employees, is now considering setting up a limited ESOP. Such a plan could have saved Ma Bell $80 million in 1975 taxes alone.

Critics of the tax breaks argue that they amount to a gift from the Government that will mainly benefit high-salaried workers in such capital-intensive industries as oil drilling and machine tools. They are the industries that use the investment-tax credit most heavily, and their capital needs make them especially likely to grab at what amounts to a chance to borrow at low cost.

But the ESOP idea has strong support from Congress's Joint Economic Committee, and the Economic Development Administration of the Department of Commerce is actually requiring that some companies to which it gives loans establish ESOPs.

The most powerful defense of ESOP comes from Long, who waxes as fervent on the subject as Kelso. The Louisiana Democrat contends that the idea will spur managers to invest more of the $3 trillion to $5 trillion that economists say will be needed over the next decade to modernize U.S. industry--besides the philosophical benefits to capitalism of having workers become owners. ESOP, says Long in a burst of lyricism, "is better than Geritol. It will increase productivity, improve labor relations, promote economic justice. It will save this economic system."

Measuring Up. Labor leaders have been ambivalent about ESOP, but at South Bend Lathe, United Steelworkers Union members are enthusiastic, and two local representatives sit on the company's board of directors. Union Organizer June Molnar, 26, a tool and cutting grinder, reports that workers check out new recruits to be sure they measure up. Slacking off is not tolerated.

Says Molnar, who expects to get about $2,000 deposited in her ESOP account this year: "It's 'Hey, you've got your hand in my pocket if you don't do your job.'" Molnar's boss, SBL President Richard Boulis, 53, is just as ebullient.

Contemplating a 20% rise in productivity in the past year and close to 10% more pretax profits during the first year of independent operation, he exults, "Worker-owned companies are the way to go."

This file is automatically generated by a robot program, so viewer discretion is required.