I have worked in a number of businesses and i find that employee ownership in the business is important to the long term success of that business. In talking to employees who have some sort of ownership in a business, they feel more engaged, are more understanding of the challenges of management and tend to go above and beyond far more often. Now the question is how can employees gain ownership in a business?
If the business is listed, then employees can of course buy shares on the market. Management can make this process easier by implementing a discounted share purchase plan. At the REA Group, we implemented a plan whereby employees could sacrifice a percentage of their salary to buy shares at a 15% discount to market. The company pays the difference and purchases the shares on the market for the employee.
Another approach is share performance rights. We implemented this for senior management at the REA Group. The share performance rights work as follows. At the beginning of a period, each employee is allocated a number of share performance right. For example they may be given $100,000 worth of share performance rights at the cost of $5 each (usually the weighted average of the period just before allocation). This would be 20,000 share performance rights. Now usually these have a vesting period of say 3 years - therefore the 20,000 share performance rights would vest in 3 years time. Now as they are performance related, they are usually tied to the long term performance of the business - the 3 year plan. At REA they were tied to the 3 year revenue and EBIT targets. Therefore if you hit the targets, then you get the performance rights and if you under or over achieved, then they were prorated up or down.
Yet another approach is to allocate options to employees with a vesting period. The number of options allocated could also be tied to the performance of the business.
Now i have a couple of thoughts on this.
Firstly, in uncertain times, share performance rights are probably preferable over options as they will always have a value. Options may not have a value if the share price is lower than the strike price.
Secondly, i wouldn’t tie the number of share performance rights or options allocated to the performance of the business as the value of them is already tied to the performance of the business. If the business is going well, they will be worth more and if the business is not tracking well, they will be worth less. Having the amount allocated tied to performance is almost double dipping. In addition, as the number of rights / options are tied to performance against a long term plan, you may have management making sub-optimal decisions, especially if long term investment or divestiture is required but it would affect the performance against the long term plan. Either they wont make these recommendations to the board or the business spends too much time adjusting the long term plan to keep it fair.
Thirdly, when you have rights or options that are tired to performance, it is important that the employee has control over the levers otherwise the whole reason for having them wont work.
Finally, i think any employee ownership should be at all levels of the business, not just the management. It is important that you dont create class structures within a busness - especially if you want a great culture to grow. To this extent, we are in the process of implementing an employee share ownership scheme at Artshub - another business i am involved in.
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