Jan 6, 2016

Harvard Urges To Treat Employees Like Owners

Recently, I read an article at HBR.org titled, Treat Employees Like Business Owners The article focuses on two key tools that most companies ignore when wanting to attract, retain, reward, and motivate talented people:

  • Enabling employees to build real ownership in the business
  • Open-book management, economic transparency, ownership culture; encouraging employees to think and act like businesspeople rather than like hired hands.

At Executive Benefits Solutions, we could not agree more. We’d also like to supplement this good article with some additional best practices and comments for your consideration.

1) ENABLING EMPLOYEES TO BUILD REAL OWNERSHIP IN THE BUSINESS

The article shares:

“Of course, many public corporations offer stock-purchase plans or the like as part of their retirement benefit. And everyone knows about the options collected by a select few in Silicon Valley and other tech centers. But meaningful ownership─sizable grants of stock to rank-and-file employees year after year, to help them acquire a significant stake in the company — is all too rare.

It doesn’t have to be. Many large corporations manage to find big bundles of shares (and huge amounts of cash) for executive compensation, even though there’s little relationship between senior-management pay and financial results. A portion of those assets can be redirected to regular stock grants for employees. And companies — except for the very smallest — can implement an employee stock ownership plan (ESOP), often funded through borrowing. So long as it’s sufficiently generous, either approach gives employees the kind of stake that makes them feel like true owners.”

In our work on executive compensation and benefit plans for a broad range of clients (closely held through Fortune 500), determining how to best incent employees to think, invest, spend, behave, and perform as if they were owners is almost always a top priority. The ownership mentality aligns stakeholder accountability across shareholders, decision makers, and employees. In large, public companies, stock is a relatively inexpensive and non-personal form of ownership to provide to employees. In closely held and private companies, this becomes a far more complex goal to achieve.

By their nature, private companies exhibit a myriad of complex dynamics to consider when it comes to how to share ownership:

  • Sweat equity by founders: founders may have put so much of their life’s work into a company that the thought of sharing or diluting ownership may be inconceivable
  • Succession: ownership of the company may be directed by estate planning and generational goals, including what ownership has been promised by one generation to another
  • Transparency: owners may be closely tied to their company (e.g., tax planning) that it appears to be invasive to share the inner financial information with non-owners
  • Exits and value realizing events: owners feel the need to be cautious when sharing their plans around exit planning since the business has an inherent “flight risk” by employees who are part of the core value of any business.

2) OPEN-BOOK MANAGEMENT, ECONOMIC TRANSPARENCY, OWNERSHIP CULTURE; ENCOURAGING EMPLOYEES TO THINK AND ACT LIKE BUSINESS PEOPLE RATHER THAN LIKE HIRED HANDS.

The article shares:

“At open-book companies, it’s part of everyone’s job to contribute to the success of the business…They reinforce the ownership mindset by sharing profit increases with everyone, usually through bonuses funded by the increase itself…’Actually,’ says Harvard Business School professor Leonard A. Schlesinger, ‘when employees know more about the business and have an economic stake in the outcome, there’s a high probability that turnover rates would go down exponentially.’”

Again, well said. In our experience with private companies, executive teams are often challenged to compete with large, public companies for talent where those organizations have endless talent and funding resources to implement best practice equity plans. And, of course, the large, public companies have publicly traded stock that has advantages of volume and liquidity.

To compete in the marketplace for talent, private companies have to think outside of the box. Fortunately, private companies are good at this as they have an entrepreneurial spirit in their DNA; with that DNA, comes the interest by ownership to want their key people to have an owner mindset but without diluting ownership’s equity.

A valuable alternative for private companies to be competitive? Phantom stock plans . This diagram illustrates how phantom stock fits into an overall compensation and benefit strategy:

EBS has created a webinar-on-demand that brings together the key concepts of implementing a phantom stock plan. We encourage you to view it and take advantage of this information.

PLAN MODELING

The Certant whitepaper describes the considerations for determining what percentage of equity a company should offer in its equity plans. The hard part of this step, however, is to model out the plan variables and scenarios by title, company performance (Multiple of EBITDA? Multiple of Revenue? Multiple of profit?), employee performance, and financial impact to the company.

EBS has created a phantom stock plan modeler to help create these detailed scenarios and their financial impact, Please click the link to learn more.

PLAN FUNDING

A phantom stock plan creates a liability on the sponsoring company’s books. While a plan does not require cash funding, it may be important to plan participants to know that the company is backing up the promise with funding:

  • To provide a degree of benefit security to participants;
  • To match plan liabilities with a pool of assets; and
  • To reduce plan cost through tax-advantaged pre-funding.

There are several approaches to plan funding: sinking funds, corporate-owned life insurance, mutual funds, and other assets. A detailed funding analysis is necessary to determine the funding type most appropriate for a company. We welcome your contact and questions.

Trevor K. Lattin
Managing Director
Executive Benefit Solutions
949-306-5617
tlattin@ebs-west.com