Cambridge Investment Research founder Eric Schwartz has put together a highly structured several-year plan aimed at sharing company ownership and, ultimately, allowing it to remain independent. (Read the story here.)

The main pillars of the plan are as follows:

1. Stock Ownership Transfer

Cambridge sold its first 3% block of stock -- worth a mere $200,000 -- to its advisors in 1998. Last month, the firm was in the process of closing on the sale of 1.4% -- worth close to $4.3 million -- to about 37 advisors. The firm also has made multiple smaller stock offerings to senior managers; last year, for example, the number of those shareholders increased to 13 from eight.

CEO Eric Schwartz anticipates that, in coming years, Cambridge will convert to a C corporation from an S corporation, limited to 100 shareholders or fewer. Until then, however, the firm will take advantage of its current, more favorable tax status. C corps requires two layers of taxation, on corporate profits as well as on dividends distributed to shareholders; S corps are not themselves normally subject to tax on earnings.

2. Equity Participation

Because its current S corp status limits shareholders, Cambridge also offers equity participation programs to its 500 employees as well as advisors who bring in enough gross dealer concessions annually. Although the programs do not transfer stock, they help employees share in stock appreciation. For example, an employee might be eligible for the appreciation on 1,000 shares currently priced at $3. “If the stock goes from $3 to $6,” Schwartz says, then upon vesting, “we write you a check for $3 times 1,000 shares, which is $3,000.”

The setup helps retain key employees, even those who can’t yet own shares, says Cambridge President Amy Webber.

3. Employee Stock Option Plan

Cambridge intends to launch its ESOP sometime in 2017, when the existing equity plans vest. Schwartz intends for it to buy about 20% of his stock over time. The ESOP would be available to the broadest number of employees possible, including senior managers, middle managers and certain key employees, like programmers -- but not to Cambridge’s non-employee advisors.

4. Super Bonus Pool

Another retention strategy centers on an existing “super bonus pool,” which rewards every employee for Cambridge’s overall growth. Like the equity participation plan, it is aimed at employees who don’t have equity stakes; it pays out based on the change in the stock’s value over time, typically in five-year increments.

5. Transfers to Charitable Foundations

Schwartz says he aims to transfer another 20% of his ownership to charity. He and his wife have formed the Schwartz Family Foundation, which may name a yet-to-be-created Cambridge charitable foundation as a beneficiary.

Schwartz plans to create a mechanism letting Cambridge insiders buy back stock shares from both foundations -- generating cash for charitable work while moving more of the firm’s ownership to key players.

6. Designating an Heir

Schwartz says the firm’s “presumed heir apparent” is Webber, a 15-year Cambridge veteran who joined the firm when it employed just 22 people. Below her, Cambridge also has a bench of 16 vice presidents from which to draw talent.

“Once [Schwartz] finds someone that makes decisions similarly to him,” Webber says, “he has no problem giving them power to do their job. His ability to empower people has made a big difference here.”

Schwartz doesn’t anticipate that Webber would fully replace him for another 15 to 20 years. When she does, she will not have the same control that he does today, as the overwhelming majority shareholder.

The firm plans to concentrate power in the hands of a few board members by creating classes of voting and nonvoting stock: “Though we may not be the majority shareholders, one of the ideas is that we will retain control,” Webber says.

Given that there will be more equal splits of power between those board members, conflicts could arise, she notes. However, given that everyone at Cambridge will hold substantial shares, she hopes the firm’s overall welfare will remain uppermost in their priorities.

“If for one minute, then or now, I thought that I was not the best person for the [top] job, I’d be a part of the decision of who would be,” Webber says. “I’m an owner of this company … and sometimes you have to be part of a tough decision that impacts you negatively as a leader.”

7. ‘Hit by a Tractor’ Plan

What happens if Schwartz gets, proverbially, “hit by a bus”?

“First off, I moved to the place in the country where there are no buses,” Schwartz jokes of his decision to move the firm to Iowa from suburban Washington in 1992 to reduce the company’s expenses. “So the question is, ‘What if I get hit by the proverbial tractor?”

There’s a plan for that, he says. Already, Schwartz says, his entire 88% stake is held in a series of trusts that he controls, along with Webber and other senior managers. If he were to die unexpectedly, those shares would transfer to his family foundation. Webber and other managers are also trustees of the family foundation. This structure is designed to ensure that, even in the short term, no estate tax will be owed by his estate and that ownership of the company will remain with Cambridge’s leaders.

“Over time, the firm could buy [shares] back under the terms of the trust structure,” he says.

The firm also has purchased millions of dollars in life insurance coverage on Schwartz to cover legal and accounting fees associated with the settlement of his estate, as well as the expenses of an executive search to replace him if, for any reason, Webber or another executive were not able to step in.

See the full story: Cambridge Sets Plan for Handoff

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