PUTTING THE ANIMALS IN CHARGE OF THE ZOO: Release workers from their cages, make them owners and then watch your firm grow.
Leader's Edge, March 2006
Author: Robert J. Lieblein
- Give employees a stake in your firm. They’ll act like they own the place and boost performance.
- Private firms should choose the type of equity participation plan that best matches the corporate structure and employee needs.
- Share equity throughout the firm to create a culture of ownership.
Please stand and repeat after me: it is easier to keep a customer than to solicit a new one; it is easier to keep a good employee than to train a new one; it is easier to keep a business going than to start a new one.
While this mantra is surely worth repeating, saying the words won’t boost performance and raise your growth rates and profitability. You have to live them. But how? If you want to accomplish real change in you agency that will achieve a sustainable company culture of organic growth, high morale, low turnover and excellent customer satisfaction, put the animals in charge of the zoo and practice what’s often referred to today as “partnership capitalism.”
Numerous studies have shown that employee-ownership improves the financial results of companies and, in turn, increases shareholder value. There are critical strategies for recruiting, training and retaining your staff, which are essential to bottom-line success. Employee-ownership is one of the most effective ways to recruit and retain top talent.
Don’t Knock the Stock
Equity ownership plans have traditionally been a technique used by public companies to a greater degree than privately held firms. Widespread success of stock-option plans was first seen in the computer industry in Silicon Valley as early as the 1950s, and they became the rage during the recent dot-com boom years. Many privately held companies have joined the bandwagon on the theory that an owner cannot pursue increased growth and profitability through an employee base that does not share the owner’s interests.
An article in the June 2005 edition of Harvard Business Review demonstrated how much faith corporate America is putting in employee-ownership: in 2004, 10 million workers were invested in employee stock ownership plans (ESOPs) at nearly 11,500 U.S. companies. Four thousand more companies offered some other form of equity participation for employees. Overall, about 23 million people—39% of employees working at stock corporations—currently hold equity in their companies.
Yes, you might say, but my brokerage is not publicly traded. Never fear, there are equity programs in your flavor, too.
Or maybe you are managing a company that already offers stock participation, but how well is the program performing? Perhaps it’s time to take a fresh look at your equity ownership plan. In the end, the goal should be to answer the following question: “How do I create an equity plan that truly tips the balance of the conventional employment equation so employees will think and act like owners and believe in the same goals and objectives that I do?”
Beyond the Fringe
Historically, agency leaders have considered equity ownership as an employee benefit, but that idea should be turned on its ear. If you’re building shareholder value, profits are increasing at a greater rate, employee turnover is low, customer satisfaction is high—who is the primary beneficiary? The owners, that’s who. If you truly equate equity participation with ownership, then, yes, it’s an employee benefit. However, how about restating equity participation as an “owner benefit” that encompasses the fortunes of all your employee-owners? In this zoo, there should be no cages.
Let’s examine in more detail some of the benefits to your company and its community of owners, customers, represented carriers, etc. Consider how your operation would be changed if you adopted these benefits as a goal of an equity program.
- Efficiency gains. There’s no better way to uncover inefficient procedures or quickly take care of problems than to post every staff member as a lookout. You’ll not only find out where you can improve, but if you empower your employee-owners to take action, you can see quick improvements.
- Entrepreneurial attitude. Following on the empowerment theme, if everyone is constantly looking for ways to change for the better, your employee-owners will feel more like they’re at a company that is innovative. Those feelings engender a more creative workplace, and that builds morale. We all know that morale, creativity and innovation are feelings that can drive a more pleasant customer experience.
- Recruiting advantages. Who wouldn’t want to be part of a company with the aforementioned virtues? You can use the financial benefits of employee-ownership as well as the creative, innovative work atmosphere as selling points to attract top performers. Bonus: if your staff is on the path to growth, every new hire will be scrutinized for what he or she can contribute, and your staff will insist on new people pulling their weight.
- Culture enhancement. Agency culture comprises the entire set of beliefs, values and expectations that govern how people behave in an organization. Therefore, creating an environment of ownership that thrives on creativity and innovation will improve morale, building a corporate culture that is healthy and supportive. Because ownership makes everyone feel like they are all in this together, a heightened sense of responsibility and accountability will also result.
- Agency perpetuation. Thinking about cutting back on work or retiring? A key element to cutting back is leadership development. What better way to encourage leaders than to make every staff member a boss, at least over his or her own duties? Team leaders or department heads will feel an even greater sense of autonomy, and you will clearly see which go-getters would make good company leaders. You can remain a stockholder with less worry that your retirement investment will be squandered. In fact, if your employee-owned firm is true to statistical models, your return will be at least a few percentage points better than a comparable firm without equity participation.
- Better management tools. Employee-ownership allows a management culture that is able to better align incentives of all employees to measurable results. This clear and open procedure can enable an agency to grow faster and more profitably than traditionally owned and managed competitors.
The Hard Part
An effective, sustainable equity participation program does not just spring fully formed from the pages of a book or get spat out of your printer like a boilerplate contract. Because your firm is unique, the plan will require your careful attention in design and implementation. Successful models exist, however, that can give you a blueprint to follow. Here are four keys.
1. Provide enough ownership to make it meaningful. Employees should recognize a significant financial advantage to being a part of the program. Similar to a successful strategic plan, there should be both short- and long-term goals and rewards. The plan should not only reward employee-owners financially, but should provide a concrete feeling of “ownership” that is evident on many levels, from completion of everyday duties to big-picture review of the firm’s financials, competitive status and mission. Remember that, if ownership does not make a difference in your wallet, it is likely that it will not result in significant changes in the way your agency operates. The reality is that ownership, in any form, is about generating wealth.
2. Spread ownership to many levels. If your equity participation plan extends only to upper management or senior staff, chances are you’re not going to reap the full benefits. Consider offering the program to as many of your staff as possible because the greater percentage of employee-owners, the more harmony and strength of mission. The goal here is to build a culture of ownership.
3. Give the program your full support. Any companywide initiative that does not have a well-thought-out plan, management buy-in and continual support will not achieve its full potential. So it is with equity participation. If your staff feels the program is only window dressing for PR purposes, or only receiving lip service to placate unfulfilled employees, your people will not internalize the best aspects of it. The potential for empowerment and morale building will be greatly diminished or never materialize at all.
4. Back up the program with communication and education. The program needs full explanation and implementation to get buy-in from staff. That can only happen with a good education program and regular communication about the program. Recognize upfront that most employees are not sure what their ownership entails, so they also may not know how to act or what is expected of them. Employees must learn to think of themselves as owners. The most successful companies incorporate their programs every day in many ways. Employee-ownership becomes a mantra, and you can get a good explanation of how it works from anyone on your staff. If that describes your program, you know that your education mandate is effective.
Which Plan Is for You?
The type of plan you choose should mirror your corporate structure and the needs of your people. There is no blueprint for an equity model, nor is there just one way or right way to implement the plan. For example, each plan comes with its own financial and tax advantages and disadvantages.
Stock options. This is perhaps the most simple and commonplace and therefore easiest for employees to get behind. You grant employees the option to buy a certain amount of your stock as of a particular date. The total amount of stock awarded is generally “vested” in percentages over a number of years. The employee can exercise the option to buy the stock as it vests and then can choose to hold it or sell it at some future date.
Restricted stock options. You grant shares to an employee, for which he or she pays nothing. The employee must hold the shares for a prescribed period of time and must still be employed by the agency to sell them. Restricted stock options, like performance-based shares (described below), sometimes require the company to attain a level of financial or strategic performance before the options may be exercised. If the company does not perform to goal, the options may be reduced or lost.
Stock appreciation rights. Shares are granted at no cost to the employee, and the employee realizes the appreciation in the stock price from the date of the grant until the option is exercised in exchange for cancellation of the underlying option.
Performance-based shares. Option grants are based on agency performance on specific financial and strategic measures, such as growth in revenue, profit margins or retention rates.
Performance units. Similar to performance-based shares, this program is created with dollar amounts instead of stock. The performance unit’s future value when vested is contingent upon achievement of specific performance objectives.
Phantom stock. More closely associated with private agencies where agency shareholders do not want to give up any actual ownership, this type of program creates a pool of “virtual” stock shares, which are then granted as options. Generally, the value of these is also based on financial and strategic results achieved by the agency.
Qualified employee stock purchase program. An ESPP allows employees to buy company stock through payroll deductions at a discount (generally about 15%) of the stock’s fair market value.
Employee stock ownership program. ESOPs are also quite commonly understood and often used. The ESOP borrows money to buy the agency’s stock (either entirely or some portion of it) and then distributes the stock to employee retirement accounts as the loan is repaid. When employees retire, they are paid in cash the value of the stock in their ESOP account.
Why Equity Plans Work
Dell, Microsoft, Hewlett-Packard, Amazon.com, Google—all these successful high-technology firms and many more all use stock-based compensation. In fact, it’s hard to think of any successful high-tech firms that did not have such programs as part of their strategic growth initiatives. What’s good for the byte is good for the broker.
Your agency has one big element in common with those companies: entrepreneurial firms are always seeking new ways to reward people who contribute positively to shareholder value.
Equity plans work when they hold out the promise of a significant payoff for significant strategic results. The gain must be measurable for it to drive employee performance.
The plans also need to be tied to very measurable objectives. That means you must treat employees as owners (yes, that means sharing certain financial information), and you must hold educational, informative sessions to help your staff understand the drivers and metrics that are keys to success.
If you review the modus operandi of companies that are successfully using equity plans, some key trends emerge:
- Pay for performance is mandatory;
- Merit systems are out;
- Performance objectives are both strategic and operational;
- Multiple plans are common;
- Incentives are easily identified and measured by employees;
- Equity plans are flexible; and
- Equity plans are going broader and deeper into an organization.
In short, to create a successful equity compensation plan, develop a program that has obvious ties to company success and encompasses as many employees as possible. If you can do that, you’re halfway home.
Starting Your Plan
Now, are you ready to start developing your own equity plan? Consider these steps as a starting point.
- Base equity compensation on a “scoreboard” system.
- Align the plan with your strategic plan.
- Separate equity compensation from compensation derived from ongoing business results. Seek an appropriate balance between the two.
- Make the equity compensation large enough to provide motivation and a financial impact on the employee.
- Build in rewards for performance that yields extraordinary results.
- Build in flexibility so your plan can change as needed to stay in line with an evolving strategic plan.
- Make certain the plan is clear and understood by your employees. Make education part of the implementation effort; then, promote the plan and its value as time goes on.
Your equity plan should be viewed as an investment designed to yield financial rewards and increased shareholder value. It should be structured so that it does not dilute ownership to an unreasonable degree. Above all, it should be a significant sharing of ownership, so that employees feel truly engaged and in charge of their own destinies.
The implementation of “partnership capitalism,” like the creation of a strategic plan or development of employees through a system of education and advancement, is a big-picture, business-building effort. It deserves serious consideration because the possibilities are great. It requires sober attention because much is at stake.
In effect, an equity participation program is a grab for the brass ring for a brokerage owner as much as it is for an employee. Each is putting faith in the concept that the agency is a viable vehicle for personal financial success. As President Kennedy said, “A rising tide lifts all the boats.” And a partnership, by definition, serves all partners, without domination or unfair advantage. You must truly become partners with your employees and they with you for that promise to be fulfilled.
Lieblein is a contributing writer and managing principal of WFG Capital Advisors. firstname.lastname@example.org