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‘Ownership’ Plans Put Motivation to Work

“At worst, employee stock ownership carries the illusion of partnership with no substance. At best, stock ownership underscores the organization’s intent to treat employees as owners in a thousand other ways,” wrote Peter Block in the book “Stewardship.”

Mention employee ownership to people and they will immediately start talking about employee stock ownership plans. However, there are many other structures to keep in mind. Martin Staubus, a director at the UC San Diego Rady School of Management’s Beyster Institute, defines EO as any structure that offers equity ownership interests to a significant number of employees of 30 percent to 100 percent and transforms their orientation from employees to partners in enterprise.

The goal of EO plans is to give employees some skin in the game. When organizations set up these plans, they are looking to increase profits, productivity, attract talent and boost morale.

Goals and Objectives

The structure of an employee ownership plan is determined by the organization’s goals and objectives. Some options carry varying rights to a governance role in the company.

There are five primary EO options.

Direct purchase plans: This allows employees to buy shares in the company with their own funds. Employees can allocate their after-tax pay over a period of time and then use those funds to purchase shares. By saving and allocating the after-tax funds, employees can buy shares at discounts up to 15 percent at the time of purchase or when the staff member began saving the funds, whichever is cheaper.

Employee stock ownership plan: This the most common form of EO in the U.S. According to the National Center for Employee Ownership, nearly 11,000 companies have incorporated these plans, which cover more than 13 million employees. In this case, a business organizes an employee benefit trust that’s funded by contributing cash to buy company stock, contributing shares directly, or having the trust borrow money to buy stock, with the firm making contributions to the plan to enable it to repay the loan. The ESOP plan is unique because of the ability to borrow money.

Stock options: These plans provide employees the ability to purchase a certain number of shares at a price determined at grant and typically vest incrementally. For example, if stock prices continue to increase, the plan helps retain valuable employees. In addition, some companies incentivize staff to meet specific goals and in return, grant options based on employee performance.

Restricted stock/restricted stock units: These options allow staff members the ability to acquire or receive shares, through means of a gift or by purchasing, when certain metrics are achieved. Some of these might include working a certain number of years or achieving goals. This is valuable plan to help retain employees.

Synthetic equity: These stock options are very attractive to some organizations for a variety of reasons. For example, the owners may want to share the economic value of equity, but not equity itself, or the firm cannot offer conventional ownership plans due to corporate restrictions.

There are two types of synthetic equity options.

Phantom stock: This is a promise to pay a bonus in the form of the same value of either the value of the company shares or the increase in that value over a period of time.

Stock appreciation rights: This is similar to phantom stock, but it provides the right to an increase in the value of a designated number of shares over a period of time. It’s typically paid in cash, but occasionally settled in shares known as “stock–settled” SAR.

The opportunity to gain stock shares and/or options at discounted prices is an added benefit. In addition, ESOPs are a type of employee benefit trust that allows the team member to invest in company stock.

Team Spirit

Aside from the greater pride, staff members at EO firms usually work in a more positive environment with a team-oriented atmosphere.

While an EO company’s employees benefit, there are also numerous benefits for the company, itself. Firms have found that EO plans not only lead to significantly improved productivity, but increased profits as well. A key ingredient to making this work is implementing a high degree of involvement in organizational decisions at the company.

In addition, EO corporations have a greater opportunity to recruit key prospects because of the added benefits.

Every time a person visits a Starbucks, a Whole Foods Market or travels on Southwest Airlines, they are engaging with an EO company. John Chambers, Cisco Systems Inc. CEO, said, “I don’t know of a single company in Silicon Valley that has achieved real success without issuing equity to its employees.”

While employee ownership may not be for every company, it’s certainly doing great things for many organizations.

Michael Holland is the owner of Holland Mergers and Acquisitions Group. He can be reached at Mike@HollandMandA.com.

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