The Inequity of Equity Part II The Employer Perspective
As discussed in Part I, minority equity isn't always beneficial to the employee of the privately-held company. In most cases it's not good for the majority owner, either.
The reason is simple–it creates too many problems. Providing a piece of the action is easy. Living up to the ethical, financial, and legal obligations that go with it is not. Nor is it always done.
Why is employee equity offered? It usually relates to motivation and retention. Businesses need key employees to create growth, profit, and wealth. Success requires finding and keeping talent. No wonder the ownership carrot dangles so frequently.
Passing out small pieces of ownership is a cheap, expedient answer to the perpetual question, "How can I keep them here and keep them happy?" Yet other opportunities exist, most of which are not only more creative but more enlightened.
The wants of the workplace are the same as always. Employees want good pay, complete benefits, job security, a stimulating environment, to work with likeable people, etc. It's not only what the marketplace requires, it's what employees deserve.
Some employees, however, want more. They want to emulate the employer. They want to think, participate and feel important. They want to take pride in what they do and pleasure in their success. They go out of their way for the boss. It's only fair the boss return the favor. Too often, that favor is stock incentive in the form of minority stock ownership. Some owners hand out privately-held stock like it was worthless. Unfortunately, sometimes it is.
When a stockholder awards stock, it's more than sharing a piece of paper. It's a pledge. When that pledge is broken, for whatever reason, it's a mistake with serious consequences.
One pitfall of the minority stock ownership incentive in privately-held organizations is the business is seldom set up to do it right. Inadequate documentation, poor design, and willy-nilly corporate execution of legal requirements top the list.
The stock incentive is one of two primary incentive concepts. The other is cash-based, and there are literally hundreds of adaptations of each.
Stock incentives can be troublemakers for the privately-held company. Most stock incentives are improperly designed and administered. They create more problems than they solve. Issuing privately-held minority stock to an employee has, for many, been operationally and legally disruptive.
In reality, many business owners are willing to give stock because they don't think it will ever be worth anything significant. Lawyers love to find stock incentives in privately-held firms. That's one good reason the rest of us shouldn't.
An employee sees the stock incentive formula as complicated, ambiguous, and probably showing favor to other employees. Cash incentives significantly reduce these problems. From the employee perspective, cash is tangible. Those who sincerely want to achieve excellence in a privately-held organization should think cash when thinking incentives.
Effective incentive plans have several of the following common denominators:
- The plan is formal and written. It is fully understood by those who participate.
- It is objectively measurable and readily definable in dollars.
- It is substantial enough to be important to participating employees.
- It is fair, providing appropriate levels of participation for all employees.
- It considers both earnings and tenure.
- A person or persons who employees trust makes calculations.
- The distributions are frequent, monthly if possible.
- Regular communication about the plan is scheduled.