Monday, May 5, 2008

Is Employee Ownership the Key to Retaining Key Employees?

Will a "piece of the action" be effective in retaining key employees? Will "skin in the game" step up their commitment and dedication? This is an ongoing topic in Chief Executive Boards International member meetings.

Business owners wrestle regularly with the question of whether minority ownership interest on the part of employees or key managers is a good thing. The answer isn't obvious. What's really not obvious to most owners is that many employees neither want or care about ownership. Someone once told me of the 92%/6%/2% relationship -- 92% of the US workforce just wants a regular job with a regular paycheck. 6% want some kind of performance-based or incentive compensation -- most of these are probably sales people. 2%, on the other hand, actually want to put some money on the line and enjoy the rewards (and risks) implicit in business ownership.

The first rule of employee ownership is that they have to buy their way in. That stops many would-be employee owners in their tracks. If you take only one thing away from this article, make sure it's this: Don't give away equity. It's too precious, and people simply don't value things for which they've paid nothing. They don't understand the value of ownership, they don't ascribe a value to it, and therefore don't think twice about walking away from it. And you could wind up buying it back from them when they do!

To allow employees to purchase equity in your business, you'll need a process by which to value shares you offer employees for purchase. Then you'll need to decide to which employees you want to offer shares, and how many shares to offer. That's where the disappointment sets in for most owners. In fact, I've seen owners downright offended by their employees' incredulous reactions: "You want me to pay for that?" or "Why would I want to do that?". You see, they didn't come in the door looking to be owners. They came in looking for a job. And for almost all of them, that hasn't changed.

So, if employee ownership isn't the answer, what is? One alternative is a well-designed long-term compensation plan. This is in addition to a quarterly or annual bonus plan. Both need to be clearly tied to well-defined goals and performance objectives.

How does a long-term compensation plan work? First, it has a longer time horizon, usually two to three years. There are performance criteria set for the current year and 1 or two years going forward. Thus the first calculation is made after year 2 or 3. Then there's a vesting period -- the money isn't immediately paid out, and accrues as deferred compensation, just as the value of equity would.

And if the employee terminates within the vesting period the deferred compensation isn't due at all. Vesting periods might be 2-3 years. In fact, some plans defer the payout until normal retirement, disability or death. The idea is to "quantify" the employee's cost of termination -- a leave-behind of several years' accrued long-term compensation. This trades on a basic human tendency -- to tenaciously protect something they have while only casually pursuing something they could have.

So, if your objective is retention of key employees, think beyond bringing them in as owners. For about 2% of workers, that's a great strategy. For those people, ownership has worked and does work as a retention strategy. For another 6%, a long-term performance plan may be more effective. And remember that 92% of people are just looking for a job. Retaining them is probably not your concern -- they rarely become key employees, anyway. As long as you'll pay them for the pleasure of their company, they'll keep coming around.

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Terry Weaver

Chief Executive Boards International
864 527-5917

Chief Executive Boards International: Freedom for business owners & CEOs -- Less Work, More Money, More Freedom to enjoy it

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