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How about employees all the way down the line and through the corporation? How do we align them to the goals and strategies of the enterprise? Obviously for the appropriate individuals, a bonus program aligned to the department’s goals is appropriate. But how about awarding stock options for all employees?
I discovered the power of ownership early in my management career, establishing an employee stock ownership plan (ESOP), once popular as incentive compensation as well as a tax write-off for corporations and even a way to slowly transfer ownership of a company from the founders to the employees. These plans are not as popular today because of their complexity and difficulty to manage, lost in favor of simple stock option plans.
Each month, at the monthly company lunch for all, I’d greet everyone with “Hello shareholders”, and proceed to show the assembled throng slides of high level financial statements, pointing out progress against plan. That form of open book management surprises many, but if the employees are stakeholders with a taste of equity, why not underscore the value of that equity by treating them as cohorts? Yes, sometimes the news is not good. They should know this, and from you not from the rumor mill.
[Email readers, continue here…] Your fear that the confidential information may get out to the industry competitors should be tempered by the fact that you are not giving out the secret sauce, just the results of the past period’s performance. All public companies including your public competitors must do this in greater detail each quarter, and it rarely damages their ability to sell into the marketplace. Would bad news drive your best employees out the door? Perhaps. But it is my experience with many companies that empowered employees, treated with respect and shared knowledge, will go far beyond expectation in remaining loyal to their associates and their employer.
And think of the time saved around the virtual water cooler if there are far fewer rumors to pass among your employees.
Your posts are always insightful. What percentage ownership in stock options would you recommend for different employees (by position, e.g., CEO, CFO, VP, Manager, Clerical/Admin) at (i) a pre-revenue start-up; and (ii) a $30 million to $50 million revenue company with positive EBITDA?
Thanks,
Rob
Rob,
There are formulas for startups: CEO= 5-8%, CFO=1.5%, VP=1-1/14%, manager 1/2%, clerical 1/10 to 1/5%. In a larger company it depends much more upon the cap table, especially how much of a percentage of the stock option plan shares have been issued and outstanding as options. If the pool remains at 20% for a larger company, then you must look at the remaining option percent available. Your investors will not let you expand the pool beyond 20% in most every case, so your ability to grant larger options is limited. And in a larger, later stage company, you are probably closer to the liquidity event and with less risk of dilution and failure. That warrants a lower option grant. BUT it always depends upon how competitive your recruiting effort is as to what you must offer. Give away too many options early and your choices are fewer later… Hope this helps.
Dave
This is something that economists who specialize in the relatively new applied field of personnel economics do not understand very well, so I’m interested in your experience here. Your “plan” of shared equity to all employees provides incentives to workers as long as the company is small enough so any one individual’s effort can affect the stock price. But I would guess that for many lower level employees in many firms their efforts cannot have such an effect. An example would be a teller at Bank of America. Yet, I believe B of A along with many other firms did provide a few shares to all employees at some point. Perhaps this works because of “peer effects”, i.e., employees monitor each other because they know they are “owners”? I think there’s still a lot I’m still missing something here as to why this works.
Robby,
Thanks for your comment. I should have limited this insight to tech companies and others where the race to find good employees is most difficult. I do believe that any company can benefit from employee ownership, but this is a question of degrees. In the tech world, there are lots and lots of stories of people taking a salary reduction to jump to a startup with promise and stock options. The best programmers, for example, can command 1-1.5% in options, which could have real value. Hope this limiting of the issue helps.
Dave