Man, I’m Glad We Didn’t Do an ESOP

Hello, everyone. Welcome to the 21 Hats podcast. I'm your host, Lauren Feldman. This week, Matt Hoying, who was president of an engineering firm in Ohio, explains to Sean Bussey and Jay Goltz how he created a do it-yourself employee ownership plan for his business. Some 10 years ago, Matt's predecessor as president tasked him with selecting an ownership structure that would engage employees and help the firm be as successful as possible. That sent Matt on a mission of discovery in which he researched the pluses and minuses of every structure he could find, including employee stock ownership plans before ultimately creating his own structure. Matt's plan doesn't enjoy the tax advantages of an ESOP, but it opens ownership even to part-timers, and it requires employees who want to be owners to make a financial investment in the business. In other words, they aren't given ownership, they have to buy it. Sean and Jay quiz Matt on the choices he made and how the plan has worked out. Even in good times, owning and running a business can be a lonely pursuit. Our hope is that these weekly conversations brought to you by our principal sponsor, the Great Game of Business, will let owners know they are not alone in facing challenges. Same thing with our daily newsletter, the 21 Hats Morning Report, which Ike magazine named the best newsletter for business owners and which you can subscribe to for free at 21hats.com, where you can also find transcripts of our podcast episodes and lots of other articles and interviews. Joining me this week on the podcast are regulars, Sean Bussey, CEO of Kinesis, which is based in Portland, Oregon, and works with small businesses on marketing, culture, and strategy. Jay Goltz, CEO of the Goltz Group, whose companies in Chicago include a picture frame business, artist frame service, and a home furnishing store, Jason Hol, and Matt Hoying, president of Choice One Engineering, a civil engineering firm that is based in Sydney, Ohio. The episode is titled, man, I'm glad we didn't do an ESO. Welcome, Sean, Jay, and our special guest, Matt Hoying. It's great to have you here, Matt. Great to be here, Lauren, thank you. Maybe you could start by telling us what Choice One Engineering does and then giving us a quick overview of how employee ownership works at Choice One. Choice One Engineering is a professional services company, um, specifically civil engineering, surveying landscape architecture services. We work with public municipalities as well as private developers in Ohio, Kentucky, Indiana primarily. We have at choice 1 an open employee ownership structure where generally if you've been here for 3 full calendar years, you have the opportunity to buy into the ownership. We have an internal board of directors that approves that and and sets the amount of shares that can be sold, but If you've been here for 3 years, our hope is that you exhibit those characteristics that we're looking for as fellow owners, and we have shared levels and share structures that we can get into that each employee can buy up to that amount of ownership, and we currently have 40 of our 79 employees or owners, and it's 100% employee owned? Correct. You must be an employee of choice one if you want to be an owner. Wait, go backwards. Tell us how it all, I mean, where did the founders go? How did that whole thing happen? Great question, Jay. There were 5 founders originally of Choice one, and they all were original owners. They had a philosophy in place of they didn't want any one owner to own more than 50% of the company. So at the time, the president of the company owned 45%. And their structure was also an open ownership structure, I would say it more closely would resemble a key employee retention structure, where new owners were invited to become owners. They, they also had to buy into the company, but they were invited to be owners. There's no real clarity or structure around who got invited or when they got invited. And we currently have 3 of those 5 founders still as members of Choice One, so they're still part owners. 2 of them work daily in the business. One of them, the original president of Choice One, is in the process of selling out as he's reducing his involvement in the company. So when you say selling out, the question is, how does that work? He's got a check for the, that's to say. He still owns 45%. Does he get a check for 45% of the appraised value of the business, or how does that work? Yeah, we do a yearly valuation, and anyone that would sell or buy shares, we sell them that transactions at that yearly valuation. And we created a step down sellout plan with him that he is selling so many every year, and we'll write him a check for those number of shares every year. And he obviously has to pay tax on that money, right? Correct. And do you know if this is different, and I have no idea. Is this what happens at accounting firms, law firms, medical practice? Is it, isn't this similar or is this what happens in those kinds of places? My loose understanding is, yes, it's similar to that. I have not found one of those places yet that's been quite as fully inclusive in the ownership, that there may be certain principles that are asked, you know, we'll sell our shares to a certain group of people, but not Every employee has the option, whether they're part time or full time to buy in, which is what our current structure is set up as, and we have a number of unissued shares. Currently there's of our 1000 available shares that Choice One can sell, we've issued 612. So Tony, the, the original president of Choice One, doesn't have to sell a share for a new owner to buy a share, if that makes sense. So you can issue new shares or are you buying them back through the company when you said we buy them, yeah, can you clarify that a little bit? Yeah, the, the company buys them back and we essentially just retire that share. So, for example, we just went through this process here at the beginning of the year and Tony sold 8 shares back. We now have, we've retired those 8, but we, that allows us to sell 8 additional shares. We're currently limited at that 1000 number as that was set up in the original code of regulations of the, of the company when they founded Choice One. So every share that he sells back or anyone sells back its retired, and we now have that many more that we can sell to new owners. You know, when I met you, Matt, I don't know exactly the size of the firm, but I want to say it was 40 or 50 people, and now you're twice that size, give or take. So I assume that one share is worth considerably more now than it was back then. So, A, is that true? And then B, does that create any tension in terms of the cost of buying in? Yes, it's true. Our share value has continued to increase. Um, we do a composite over 5 years share value, so we try to smooth out the, the peaks and valleys. Um, we try to set a lot of things up in the structure so that it wouldn't encourage someone to try to game the system, so to speak. Hey, you know, this year looks really like a really great year. I'm gonna sell out. And then next year with the economy is looking down or whatever, I may buy in kind of thing. So the share value has continued to increase gradually, um, when I say gradually 12 to 15% a year, year over year. And then we also, you asked if that causes tension on, on people buying in. Yes, it has and and does. We've done one share split already back at the end of 2019, when the price to buy in just seemed Unattainable. You know, there's kind of a fine line there of what's that number? What can someone afford and what makes sense to ask them to buy, to pay to buy in and not. We're financially transparent. We have a bonus structure set up through that and we've kind of loosely said that it takes 3 years once you've been here, 3 years to buy in. If all you did is saved your bonuses over those 3 years, we want that to be enough to be able to buy a share. There's no exact science to that, but that's just kind of loosely what we've held internally as our board of directors as what's that number that's going to tell us, you know, it's time to split these shares again so they become attainable for people. Are you comfortable telling us what, what that number is in dollars? Yeah. Um, the last time we split them, it was when they went, the share price went above $30,000. So we split it. Our philosophy is we want there to be skin in the game, right? We want you to have to buy in, we want there to be some pain, so to speak, of buying in. Part of our hope with the structure is, it's going to encourage behavior change. So if, you know, that was one of the things when I looked at the structure and changing the structure. I didn't like about an ESOP, and I'm by no means an ESOP expert, but the thing that I didn't re. with the plan was, you just kind of earned ownership, you know, for being an employee there. Um, I didn't feel like that was going to really encourage behavior change. Where that relates to this conversation is we want to split it at a number that's not going to make the new price, you know, 30,000 now is 15. We still want to make that new price something that is Enough skin in the game that it's going to encourage, you know, still encourage that behavior change. Matt, let me stop you there. I'd love to, you, you've just referred to the changes that you made. Your system has evolved through the years. It's not the same as it was when you first joined the business. Can you take us through that process a little bit? I know you're president of the company now, you worked your way up. What was the system like when you started the business and then how did you come to make those changes? Yeah, so I started full time in 2007 and was asked to become an owner in 2009. I had no idea why they were asking me. I mean, I, I was, I was very appreciative of the fact that they were, but there was nothing in writing anywhere that said, this is what you need to do as an employee to become an owner. And when I was asked to become an owner, there was actually uh employees that have been here longer than I had that weren't owners. And I can specifically remember the former president and I went for lunch when he made the offer, and I, I remember asking him. You know, what's this employee gonna think about me being an owner and they're not an owner. And, you know, at that time, I was what, 24? Wow. I think I'm still pretty naive today, but I was especially naive then. Let's just be clear, he's also not your father-in-law, right? Correct. That's correct, yeah. OK, I just want to get that out of the way because frequently that's what they don't tell you until you figure it out later. OK, good. Yeah, completely unrelated. So it's just like one of those movies where there's the chosen one. I mean, Sean, you kind of joke about that, but that's, that was how the structure was set up is, hey, there's certain key employees that we don't want to lose, and this is a way to, you know, encourage them to remain committed to choice one. And that was something I didn't understand at the time and as it got explained to me. That model makes sense, and then it made sense of what their plan for my future at Choice one was. So it, it was, it was very much a tap you on the shoulder invite kind of open ownership structure. You still had to be an employee. There's a lot of the concepts today that I took from that structure because I really liked the way they set it up. But in, in, I'm gonna fast forward now to 2014. Choice one went through a pretty transformational year in 2014 where we, we really sat down and looked at what kind of things are keeping us from being the company we want to be. We have a purpose of providing fulfilling lives for a lifetime and a lot of what we do runs through that filter. I mean, everything that we do runs through that filter, but we, we looked at it and said, what's, what's not allowing that. And two of the things we honed in on is, you know, we, we talked about wanting a company of people who think, act and feel like owners. Well, we weren't fully financially transparent, you know, we were transparent in the standpoint of if I asked a question or if anybody asked a question, the president or anyone else would have happily explained it to him, but there's no education around it, there was no, I don't know what to ask. So we went through in 2014 and created our financial transparency model and with that, we had myself and the former president, Tony had the conversation of what else is there? And I said, If we want people to think, act and feel like owners, my opinion is I think they actually need to be able to be owners. Um, you know, we can't just expect that opening the books is going to be everything that we need to change that behavior and, and get them engaged at that level. At the time, him understanding the financials much better than I did, he took on the. Financial transparency model and said, I'm gonna, I'm gonna set this up. He gave me the um the reins to create an ownership structure, to modify the ownership structure in a way that resonated more with what we wanted to be as a company, who we wanted to be as a company, but also, you know, that was a time, 2014 was really when we announced it to the company. Matt would take over for, for Tony as president. The plan was that was going to happen in 2021. That actually all moved up, but, um, Tony looked at it and said, you know, this ownership structure is going to be something that affects the future of choice one for a long time. Why don't you focus on this because, you know, I won't be around for as long as you will to realize the benefits or the pains of this ownership structure. So I, you know, 2014, I'm, I'm 29 and just I have an engineering degree. I didn't, I didn't go, didn't take a single business class in college. You didn't miss much, trust me. I have to ask you this question. So what happened when you're 24? Were there not 10 other people that were there for 10 years that said, What's going on here? They took the kid and they made him a partner. Did you not have any pushback? You were 24 years old. Weren't there 30 some year olds that were there for 10 years doing the work, were pissed off about it? So when I got offered ownership, I was the 9th owner and we had 20 employees at the time. So there, at the time, there were only 2 other people um that had been there significantly longer than I had, but because of the previous structure where it was kind of, for anyone that was aware, had some observation skills, which I don't think I, I had at that time. You could see the people that were owners were key people in key positions in the organization, either key departments that we wanted to grow and become key people or currently we're key people. So there was really only about 1 or 2 people at the time that probably looked at that in my mind could have looked at that and said, Wait, why, why Matt, not me. And to this day, I mean, that, that was something that really, really stuck with me and why in 2014 when I was creating this plan, that was one of the first things that had to happen was clarity around who and how and why you became an owner, and what that process was. It certainly worked out for me, but I didn't like that. I didn't like that there wasn't a lot of clarity for myself or anyone else. You were given the assignment of figuring out an ownership structure with very little background in business. How did you approach it? What did you do to prepare yourself and then how did you proceed? Yeah, so a lot of my story here at Choice One, I'm very fortunate from the founders and the leaders of the company here that provided me the support and encouragement to, to go out and do things that I probably wasn't really ready for in my mind yet anyway. But one of the things is, we had a board of advisors, an outside board of advisors, and the present time, Tony invited me into those meetings and said, Matt, these are 3 highly intelligent experienced people, ask them, you know, ask them any questions you have, and I just started. Through them and through other contacts that I knew that our business had, I started asking people what's your ownership structure look like? What, how would you go out and approach it if you were me, I started getting books thrown at me, you know, names of books, and I started getting references like, why don't you go talk to these people. At the NCEO there's, they had a book that kind of highlighted a lot of different types of ownership structures. I remember reading that one and getting through it and my head just spinning and saying, OK, I don't understand any of this. Uh, I, I don't think so. I really need to find somebody that has each one of these types of structures. Some of them I read and just said, this doesn't, I don't like this, this doesn't make sense. But the ESOP one kept coming back as a prevalent either through the books or people, other businesses that I knew. And so I started talking to more and more people in those companies. I was a part of a Visage group, a key executive Visage group at the time. So I had a network there as well of, of people I could say, hey, what's your ownership structure look like? So I had a lot of outside resources that I leaned on. Um, I probably read more in that year than I've read in any other year in my life. Not that I'm overly proud about, about my, uh, reading, but that's where it started, Lauren. There's just a lot of, hey, I don't know anything about this topic. Let's, let's go find people who do and whether that was authors or individuals and every conversation or every book I read, I would take notes and there'd be something I like this or I don't like that and I had a notebook full of just different pages. you model this in our structure, don't model that. This is a great idea. This is a terrible idea. And I kept coming back to the president of Choice One and saying, what do you think? Because he obviously helped create a structure. I kept going back to the board of advisors and saying, this is what I'm thinking today. And it went from, you should be a sole owner company to you should be an ESOP and about anything and everything in between. And I, I can still remember, you know, one of the things about the ESOP that I unders I think I understood at the time was the tax advantage to the owner selling out, the, the owner looking to transition. I don't believe that tax advantage was going to be either there at all or as significant given that there wasn't a owner that owned the majority of the company. But I was still trying to, I felt a responsibility to those owners that had been there longer than me that either were going to be selling out or selling out sooner than I planned to, to make sure that I wasn't creating a system that was going to be unfair to them. And I kept trying to solve that tax piece, like how do I do this with a tax advantage for these guys? And one of my lunch meetings with a network friend through the Visage group looked at me and said, Matt, How many decisions do you guys make at choice one that are solely based on taxes? And I said, I, I don't think any. He said, so then why are you making taxes such a big deal here? And that was, that was one of the things that, that was one of the light bulbs that I remembered saying, OK, I can have some freedom to move beyond this piece. Now I, it still had to get approve the plan still had to be approved by all of the current owners, so they were also going to have to be OK with it, but that was that light bulb that said, OK, I really can just look at choice one, look at what we want to do, where I want to go with choice one and set a structure up that satisfies that purpose of choice one. OK, so as someone who spent a lot of time looking into the ESOPs, it seems to me that the issue is, there's no question, I don't think there is a tax advantage to ESOPs, but Just correct me if I'm wrong. The reason why you gave up the tax advantage is because A, you like the fact that they have to pay money to get into it, which an ESOP isn't that. You like the fact that, that, that not everybody is going to be invited into it. I assume you like the fact that you don't have the government in your place every day telling you what to do because there's tons of regulations with ESOPs because it's a government sponsored tax plan. So you don't have any of that now, I assume, right? Is that true? That's correct, Jay, and that's I mean, you hit the big topics there, but that last one is one of the ones that I look back on and say, man, I'm glad we didn't do an ESOP because we've changed our plan a couple times since 2014, you know, not having the control to be able to internally within our own ownership group, decide what's best for our structure was something I just couldn't get past, like, I'm gonna have the government telling me what I can and cannot do with our business. that just never resonated with me. Right? And so to be fair to the government, I understand why they do it they don't, it's just like 401k plan. They don't want somebody to be able to take this and manipulate it for the benefit of a few people. So I totally respect that the government's got their hands in it. Your plan is far more running the business in the most efficient and effective way, and by doing an ESOP, you lose some of the tools to do that. So I totally understand why it was worth giving up the tax advantages for that. Yeah, and I looked at it as a, you know, there's pros and cons, and ours isn't a perfect system by any means, right? But there's, what was the way that we could best ensure the, the future of choice one. And when I say the future choice one, I mean choice one in the way we want choice one to be. Could choice one exist as an ESOP? Yes, absolutely. But there's lots of things we do that an ESOP wouldn't necessarily encourage or support. The whole idea of an ESOP, you can't discriminate, which means if you got someone who works for you that turns out to be mediocre, you're gonna treat them like everyone else, whereas in another way you can. you can take care of the people that are taking care of the business. I mean, it's not discrimination. It's a matter of, I'm going to reward the people that deserve to be rewarded, and the other people I'm not going to worry about. And that's not what you can do with it. And ESOP is very much regulated that everyone has to be treated the same, and that that does tie your hands. I mean, I, I think, uh, kind of in defense of ESOP, you know, I think we're using a lot of terms like the government's in your business. From what I've heard from people who run ESOPs, that's not the case that the government is up in your business. It's just like my experience has been with managing a 401k, which is, it's just very compliance heavy. And so you're spending a lot of energy meeting compliance and then also, I think the more important part is you don't have the ability to be creative. In terms of how you shape and structure things as you learn things down the road, which is what I'm hearing from you, Matt, is like, you did something you thought would be right, and then you realized, oh gosh, we got to change it a little bit, and we got to change it a little more, and we got to change it more. And that's where I think the ESOP is frustrating, potentially, is the lack of creativity that you can have with it. Well, you just said it's, it's a lot of compliance. Many people would define it as having the government in your business. So I Yeah, I mean, there's a difference between like filling out forms and submitting things, which is how the 401k is for me, and like literally the government's like looking over your shoulder, which is true in some industries and some regulated places. So, right, it's not like they're reviewing your plans, it's just there are rules and regulations that you have to follow. Matt, I, I think I heard when you were talking about what this would mean for the future of the business, I think you may have been Uh, referring to another aspect of ESOPs, which is that you can't really control what a future generation of owners will do. They would have the option and maybe even the fiduciary responsibility to sell the business at some point. Was that a concern? Yeah, that, that was probably the last piece of it that really turned me off for the ESOP was that we wanted to be able to say we want to operate Choice one as we feel best for Choice one. And if that means Continue on forever, um, or if that means, you know, someday do we sell, I don't ever see that in the future that I'm involved in choice one, but my concern was that if, if a very enticing offer financially was on the table and we were in ESOP, that we would have to consider that and we like the ability to take those. Emails or phone calls that come in way too often and just say thanks but no thanks you know or just hang up. Well, he's from Ohio he's from Ohio, Jay, they're a lot nicer there than you. Matt, if you did get an offer you wanted to take tomorrow, could you take it? there is a way to sell the business. Yeah. So in our structure, the president has full authority for every business decision. The internal board of directors, which is made up of a group of the owners, their responsibilities are to approve new ownership, then you approve the buy sell transactions of shares, and to elect the president of the company. If we did want to sell, you know, I, I as president could entertain that. I would have to bring that offer to the board and the board of directors and say, hey, we have this offer. Here's the reason I think it's the right thing to pursue, and they, as the board could approve the sale of Choice One. So you're not 24 anymore. You're what, 39 now, and I have to ask, I hope, you must have been gifted at something at 24 that you must have been really and that maybe at the time you didn't recognize. Looking back, there must have been a reason why he took you to lunch and made you. Offer and had this plan to you. So looking back, what was your skill set that made you stand out so much that the guy saw you as the heir apparent, because that's pretty much what happened. Not, not a 29, not a 32, but a 24, which is pretty remarkable. So tell us, what is your gift? Jay, I, I, I, I'm gonna say what I think it may have been, um, you know, and it goes back to when I was in high school. I realized that I wanted to help people. So I have a personal vision statement of Creating a positive impact on others so we can enjoy life together. And I have everything I've done, whether that's been in high school sports or tutoring or whatever has been around wanting to enjoy life with people and helping them be successful, sometimes at the expense of my own success. And fortunately, I had a high school math teacher that, that guided me to not go get a business degree and be kind of one of many trying to make it in the business world, and he recommended. I do engineering because he thought I could handle math and science into project management, and which is really people management and be able to do them what I really love doing. So I think it starts with a realization early on in my life that that's, that's where I really got my own personal fulfillment from, but I've had people along the way that have guided me, my parents, um, you know, this math teacher, uh, college professors, and then even the, the, the people here at Choice One that encouraged me to continue asking those questions. I was always that person that I'm gonna put my head down, I'm gonna do my job as well as I can. And I'm always gonna ask, what else can I do? What can I do to help? You know, hey, I enjoyed being an engineer, but there were, I always had higher aspirations of getting out of engineering and becoming a managing people and helping, helping the employees be successful. So just kind of inherently by that, it requires me to ask questions, hey, how can I help you, right? For me to feel fulfilled, I need to know how I can help other people. And so I was asking those kind of questions. And I think, I think that that's what, what led. So if we had Tony on the show and we asked him, you think he would give that a similar answer? I think so, yeah. I think he, listen, I buy it. I think that makes perfect sense. Matt, I think you said it was 2014 when you and the founder, Tony, and the president at the time decided to kind of reassess things. Was the business profitable at that point? Yeah, yeah, we've, um, even through like the 0809 um time frame, we've we've always been profitable. There wasn't anything like that. It was just that continuous drive to want to get better, to learn and improve, continuous improvement. Well, what can we get better? How can we make choice one better this year than we were last year is, is really what triggered his thinking of Hey, we want to get into this financial transparency model. I like, you know, he, um, got turned on to the great game of Business. Ownership Thinking by Brad Holmes was a book that we, that we read, and it just, we've always had that mindset, and that comes from Tony, but, uh, you know, continuous learning, continuous improvement, continuous absorbing of information, running it through Choice One's filter to see what would make sense or not make sense, and then developing, developing the plan for us. And so yeah, we were, we were profitable then and have been ever. How do those time periods compare, Matt, you know, because I talked to a lot of owners who think that if I incentivize people with money, they'll work harder and we will be more profitable and they'll behave in a different way. So, I'm curious, what's been your experience? you know, in terms of changing, I mean, it did sound like half the company was a quote unquote owner when you took over, so it already had that in its DNA, but how is the profitability compared between those two eras? Almost. Same from a percentage standpoint. Our our percentage profitability was in the high 20s, low 30s then, and we're still in that same range today. How about um from an equity standpoint, you know, because like a lot of times. You'll have companies where the people who make, who are the owners, you know, realize a lot more benefit than like kind of the worker bees. Do you feel like that's changed or do you feel like that's, that's always been in the DNA as well? That's kind of always been consistent in the DNA. One of the things that did change in 2014 is we did put more clarity around it. It's You know, we used to be a very subjective bonus mindset of, hey, this person puts a lot of hours in, they should get a bigger bonus, not necessarily are they being more productive, right? So we put some parameters around, here's numbers, you know, we, we set a, a 15% return on investment was, was our goal for ownership. If we achieve that, then, then that's when our bonus structure kicks in and, and then there'll be some additional return. But we really set it up as, you know, hey, We know there's gonna be employees that choose not to, not to buy in. That's their choice. You know, people want to spend their, invest their money in other places or spend it in other places. That's, that's their prerogative. They can be an employee of choice one and not be an owner. So we didn't want that to get out of balance to where, hey, if I really want to financially be successful, I've got to be an owner, but we also needed to make sure that that ownership return on investment. It would make sense to invest, you know, if you're getting a 5% return on invest for at choice one, but I can put it in the stock market and get 8, then financially, that doesn't make sense, right? So, yeah. So it sounds like what I'm hearing is profits are pretty consistent after the change and going to transparent open book management. Seems like satisfaction in the company is very similar. In your mind, like what's changed for the good in making these moves? So, it's the things that are hard to measure, right? It's, it's the things that are to say, hey, would, would all of these employees be just as engaged if we didn't have this structure? We have, from an employee age, we have a very young company, so I, I mentioned that 40 of our 79 employees are owners. Well, there's only 8 of them that could be owners. So we have that many that just haven't been here for 3 years yet. So it's, it's an enticing plan, this plan of knowing that, hey, in 3 years I can become an owner. It's helped from a recruiting standpoint, it helps retention standpoint, and it, it helps, it helps people see because we do a lot of education around it too of here's how my individual impact returns some actual investment, you know, to me as an so, you know, the whole what's in it for me mindset, we've got an ability to draw a direct line there for them. And so now, If we do a good job of hiring and we're hiring humble, hungry, smart people that want to be motivated and become better employees for themselves and for the company, there's encouragement for them to do that because there's, there's either a return today or a future return when they get to that point. Matt, were you affected by the great resignation and the labor shortage? We were affected only in the sense of it was hard to hire people. Um, we, we did not, we did not lose anybody. We didn't have any turnover, we didn't have anyone retiring at that, at that point, but we had some key hires that we were hoping to find much sooner than what we did that were in that mid to upper level experience range. It just took, took a while to find those people because either, you know, the companies that had them are really holding on to them because they understood that or there just weren't that many of them remaining in the workforce. Did you have to raise your pay as a result? We did not, uh, we have our, we have a philosophy, um, the, the one thing in our financial transparency model we don't share is individual salaries, but we share the philosophy of we are going to pay national average as a base wage, and then Our hope, you know, our goal with our bonus structure is is that you're gonna be total comp in the 75% to 90% on the same national surveys from a total comp standpoint. So it's a in it together, uh collaborative setup there. Oh, OK, so your salaries then are lower than, well, they're, they're. You said 50%, but then once you add in the profit share, it's, it's 75% to 90%, right? Am I hearing that right? OK, so, so you are asking people to some degree take a little bit of a buy in even from the very get-go, right? Right. Yeah. So from the very get-go, we're saying, hey, we know you could go get. Pick a number $5000 more at a competitor, maybe, you know, we, we need to be, we need to be competitive or we wouldn't get anybody, right? Yeah. But we can then lay out to say, here's what that $5000 will look for you at this competitor. They're going to give you $2000 in bonus, and we're gonna give you 150, you know, assuming you help us be successful. Help me with this. Here's my hypothesis as to why they put you in charge. Correct me if I'm wrong. No, I, I, I think this makes, uh just tell me if this is possible. They were all hardcore engineers that were working there, and you, even though you didn't get a business degree, you think like a business person, you're asking questions, you're looking for best ways of doing things, you're trying to work collaboratively. Those are all not the same words that go with being a hardcore engineer. So they recognized that you were bringing a more modern thinking to the business, and you were thinking like a business person and Up until then, they were really just operating like engineers. Is it possible that's the reason why you rose to the position you're in? Yeah, Jay, I think that's very possible. I mean, that's, to me, that's that asking questions, showing that interest and wanting to learn. People that do that, you have some confidence that they're always going to want to keep doing that and keep improving things and so that's the person that's not an engineer. Do you know of any other companies who have adopted a plan similar or the same as what you guys are doing? I don't, I know of some companies that I've met with that have wanted to talk to me about our structure that have put in place some aspects of it. I don't know of any other company that does full you know, open ownership to any employee, like a part-time employees at Choice One can buy in and become owners. What about the receptionist that's been there for 10 years? Yeah, um, so we're a professional engineering survey surveying company by the licensing board in the state of Ohio. More than 50% of our shares need to be owned by licensed engineers or surveyors. So we have share level amounts where a full-time licensed surveyor engineers, landscape architect can own 20 shares. A full-time non-licensed employee can own. 10 and then a part-time employee can own 6. So anybody that fits any of those categories, so the receptionist, the administrative assistant that's been here for 13 years, can own 10 shares as a full-time non-licensed employee. You think that's the defining difference between your plan and a typical engineering firm? I think, I think that that's one, I think that's one of the pieces is that everybody across the board, no matter what role they play, can have that pride, that sense of pride and ownership. So we've got owners across the board in every, in every position in the company, wanting to do the best that they can do because they understand what that means for the success of the company. I know most accounting firms and law firms for sure. There's partners and most people become partners that are there a while. In engineering firms, is that the case or is it frequently owned by one person and they all work there? I would say there's, there's a good mix of both, and more of them that I personally know are more in that, hey, we've got a, a handful of partners, a small percentage of partners. The ones that are sole owned tend to be the uh the 20 and less employee size firms. Yeah, so what's interesting, Matt, is like, you're, what, or at least what I have seen historically with professional services is that it's sort of like the haves and the have-nots, right? You know, it's like there's a small group that's the partner group. And they really get a lot of benefit and then then there's everybody else. And then those organizations seem to have higher turnover, um, and sort of greater sense of like two different tribes within the company. Um, that seems to be changing, I've noticed. I mean, I'm seeing, I'm starting to see like marketers being promoted to partner, for example, in engineering firms, which would have never happened 10 years ago. Seems like you're you're way ahead of the curve and pushing way harder on it than everybody else is. Matt, is there anything looking back that didn't work out the way you hoped it would or that you wish you had done differently? There's several things that we've changed in our plan that 2014, we created this plan, rolled it out. Some of the things that were part of the plan at that time were the president and the CPO could own a percentage of shares and every other employee was on a maximum number of share level. So as new owners bought in, their value diluted, but As present, mine wouldn't, because I could then also buy more shares. We've since got rid of that and said, hey, if it's right for everyone else to be on a maximum number of shares, it's right for the president and and our chief production officer to be on a maximum number of shares as well. So those share levels when the plan was created was set that The president could own 20% of the company, the CPO could own 15% of the company. And between the two of us, we don't, we both only own 35%. So they would be, you know, if we weren't leading the company in the right direction, you know, it's not. An unbelievable as to think that they could remove us from our positions, but it did become apparent to me that that's not going to sit right, that didn't sit right, that I, that I could remain at 20% while someone who owned 20 shares and was 5% now owns 4.5% and in 5 years we only own 4 and 3, you know, their percentage keeps going down. That was something that we changed. We also had Some allowance for additional shares for what was at the time we called vice presidents of our other offices. We had, at the time we had 3 offices and Fortunately, none of the people that we had labeled in those positions had owned those additional shares when we made when we corrected this, but we ended up closing one of our offices, not because that person wasn't putting a ton of effort in and doing their best. It just the market wasn't what we thought it was maybe going to be. And that, that kind of made us realize that, hey, we shouldn't use this ownership structure to compensate you for your role that you're doing every day in the business. We should do that through salary and bonuses, right? We should do that through your compensation. So we were able to take that out of the plan, and now, you know, those people don't have the ability to own additional shares because they happen to have a skill set that allows them to communicate better and relate better, you know, those people in those titles were our business development people, um, more or less, they were the ones going out, meeting clients, um, knocking on doors, doing cold calling, that kind of thing. And when we closed that office, not because of anything Ryan was doing wrong, that was the wake-up call that said, hey, yeah, you know, we would have had to have taken those shares back, we would have to bought those shares back from him. And we, he couldn't have done anything differently to be successful, you know, he did everything we asked him to do. And so that was one thing that we said, you know, we really shouldn't use this structure to compensate people for their role, their daily role in the company. We need to do that through compensation, wages and bonuses. Do you have your own parking space? I do not. Excellent. Your own bathroom. You got your own bathroom? No. All right, you're just a regular guy. Good for you. Matt, I'm kind of curious about the compensation piece, you know, especially with the two factors of bonus and dividends for share ownership. And one of the things, this is a tension I've observed with companies where there becomes more and more owners is the willingness to to pay and invest in things that are not related to driving immediate revenue goes down. So what I mean by that is things like innovation, marketing, culture, New product creation, etc. Um, I'm curious how you manage that, you know, how you keep the company focused on not just the near term, which is being profitable, but also how do you plan for the future and changing things and creating innovation and focusing on non-billable activities. Excellent question. Uh, Sean, honestly, for me personally, I'm a very financially conservative. A lot of people will call me frugal, um, in my own personal finances. So, in an interesting way, I, I actually feel like I owe it to the ownership group and the Choice one to not be that financially conservative with the company because I, you know, I don't wanna hold their returns back, right? I don't want to hold this excessive choice one back because we're not investing in innovation and those things. However, I work for an engineering company, right? We have a lot of analytically minded people that like to see a straight line between cost and return on investment. And so it takes, it takes a lot more, you know, I spend a lot more time convincing myself, how am I gonna sell this to the group. Whereas, personally, I could just make a gut decision and say, this just feels right, let's just do it, right? But I spend a lot more time trying to get that story clarified so that when I let the company know that, hey, we're gonna make this investment. I've got the reason that I can lay out for them. This is why I think it's the right investment. Fortunately, I haven't made any extremely wrong choices yet, so I've, I've built some trust and some, some leniency from them a little bit. You have some equity, yeah, and like. That I've, it is my nature to be more financially conservative, um, so I think that that gives them some ease as well, because again, we'll go back to them. I'm working with a bunch of analytical people who also tend to be pretty financially conservative. Do you worry that that cultivates a culture of, you need a 100% win rate? Like any risk taking has got to be successful, you know, you know, because like, no, there's no good risk taking that's 100% successful, right? So I'm curious how you manage that, right? Like, yeah, that, that certainly builds in. I've, I'm fortunate right now. I have a great Outside board advisors group that I've intentionally built with people that I know are going to push me in that. There's, there's several times that they'll just look at me and say, Matt, stop thinking about it so much. You just got to do it. You've got the finances to afford to lose. You're actually holding yourself back by not investing you by not making that decision quicker and ever, you know, so I've got that kind of In my, in my ear as well of them saying, just take the risk and No doubt, Sean. There are things that probably we could invest in. We could take some um innovation and creativity with and take that leap that we haven't, may, that may have paid off, but I'm also fortunate to be in a space where industry-wide we're pretty, from a civil engineering standpoint, we're a pretty low innovation, innovative group. So even a slight risk keeps us ahead of the competition. OK, I loved your answer there, like how you You get pushed yourself. How do you create that within your company knowing that, you know, someday, I know you're still young, but someday you're going to leave, you know, how do you foster at least some risk taking in a, in a very conservative industry? We've kind of identified the people in our Team here that are those brainstormers, those people that just dreamers if you will, maths, yeah, I mean it in a way, we really like a lot of what Patrick Lencioni does, and we, we really latched on to his working genius assessment. I'm kind of known at choice one as the weirdo because I'm a WNI. I'm a wonder and an inventor, and so I, I'm that dreamer. I know who else and the rest of the company knows who else is in that group. And so we get those groups together on a regular basis and say, OK guys. What are we missing? What, what can we, what can we do? You know, AI is a big topic everywhere right now, right? So we, we put a group of those people together to say, we need you to stay on top of this for us, you know, found people that had that interest that aren't as driven by the details. And so they don't immediately stop something because they can't see the return on, return on investment. They, they keep pushing through and saying, yeah, let, let's, let's test this out. Matt, we're gonna have to wrap up, but um, I, I, I wanna ask you, based on your own experience and also on your conversations with other owners who've expressed an interest in what you're doing, have you come to any conclusions about what types of businesses this, your kind of DIY employee ownership model would work and what types of businesses it would not work for? I don't know if it's types of businesses as much, Lauren, as the cultures within those businesses. Cause I know manufacturing companies that have cultures that I think this could work really well. It's those cultures of continuous improvement, continuous growth, continuous development when they focus on people development and help wanting the, the employees to be better. And the employees themselves buy into that, which to me is a sign that that's truly part of their culture then and not just something on the wall, is when the employees want to continue to develop and make the company better because of pride, you know, satisfaction, fulfillment, whatever that may be. That's where I think a model like this works. When whenever you can have an open ownership. And you don't have one owner questioning, why is this other person an owner? You know, you, you know that they're in it to make the company, you know, they're gonna do their part in their own role to make the company as successful as possible. That's where this works. If you've got an environment where there's a lot of disparity in the culture is, let's say a hierarchy type culture where I don't trust that that person on the front line cares as much about the company as I do, I don't think this ownership structure is right in that environment. Jay, what are you taking away from this? Yeah, well, I think if you wrote a book, it would be called Running an Engineering firm like a Business, because I think that's what you've done. I think it's worked well for you because you have a bunch of professionals that, you know, engineers. I don't know that would work in a typical manufacturing company where you've got some people making $20 an hour and I mean it, I, I don't know. I, I, for me personally, I It doesn't really apply to my kind of company, but I, I totally can see where it's worked well for you. Why is that, Jay? Because I've got 130 employees, some of which are, you know, $20 an hour employees, and I It's just different and it's just for lots of reasons. And um when you've got a bunch of college educated professional engineers that are, have a different mindset than somebody who makes $20 an hour. I mean, it's not, I'm not saying it wouldn't work. I'm just going, it's not necessarily gonna, as Matt just said, it's, it's, it's different. Do you have any problem with, like, say, non-engineers understanding this or, you know, administrative folks? No, we've got field, we have field surveyors that have high school, high school education level, and one of my favorite, these stories of this employee ownership taking effect actually comes from one of those guys, you're going above and beyond because they were an owner. Wait, how much, what's that person's salary? Um, well, now they're above $20 at the time. They were below $20 an hour. That's a position that starts around $17 an hour for us. And do some of those buy in? Yeah, all of them that are eligible have, I'm surprised that they had the money. I mean, if they're making $20 an hour, they're putting food on the table. I'm surprised that they had the income to be able to come up with the 100 $200 30,000 dollars to buy in. Cost of living is a lot lower in rural Ohio too. Is that fair? That's a fair statement. I think it comes a lot to, you know, the education we do on, here's what this means, and, and here's, you know, it's an investment, right? Do people borrow money to uh to, to pay for the entry? Not from the company, but there are people that I do know that have, have loans from banks or from family. Wow, I got the family. I'm surprised the bank. I mean, the returns are amazing, you know, I mean that's, and you've got like what, 20 years of those kinds of returns or more, you know, just to be clear, when you say the bank lent the money, I have to believe they have some collateral that To back up the loan. Yes, the bank that that um Choice One banks with has offered zero collateral loans to them. Oh wow that is incredible. All right, that makes sense. They know your company and that, you know, you should always mention that that's, that's, uh, that's valuable and interesting. Yeah, that's, that's one of the reasons we, we bank with them is they're, they're a local bank and, and do things like that. That's so cool. All right. My thanks to Matt Hoying, Sean Bussey, and Jay Galz, and to our sponsor, the Great Game of Business, which helps businesses use an open book management system to build healthier companies. You can learn more at greatgame.com. Thanks, everybody. Wait, wait, don't leave yet. If you have a question or a comment that you'd like the 21 hat's owners to address, send it to me by replying to your morning report or by email at lauren@21hats.com. That's L O R E N at 21 hats.com. Do it now before you forget and don't be afraid to tell Jay what you really think. You can take it. And if you got something out of this conversation, help us reach more business owners. Tell a friend, subscribe and review us wherever you get your podcasts. Follow us on Twitter. Subscribe to the Morning Report at 21 hats.com. This episode was produced by Jess Thuberon, founder of Blank Word Productions. OK, now you can leave. Thanks for listening, everyone.