New Math of Ownership

Equity for employees means greater returns for you

By Jeff Sheets

As a kid, my teachers always talked about learning the “new math.” When I asked my parents for help with my math homework, they weren’t exactly thrilled. They would work with me and ultimately be able to help me, but in a different way than my teacher had shown me. The “new math” was just a different approach to help students understand and prove the answers were correct. Likewise, making sure that key employees have an ownership stake in your dealership can be proven to make a business better because instead of just working for a salary, they have a vested interest. As an owner, you might be afraid of the opportunity to do something in a new way, but the results will bring you a better business with more engaged employees.

When it comes to equity in your company, you have three options:

1) No equity: Employees work for the company for a salary, but they have no interest in the overall welfare of the company. This is the standard.

2) Limited equity: Employees have some ownership, but nothing that causes them to really feel they are owners. Generally, they do not participate in making the business better or more efficient.

3) Significant equity: Each employee has a minimum 1-percent equity in your company. You set aside a total percentage of ownership for your key employees, giving them the opportunity to look at the company differently. Then, they know if they help the company generate a profit, they will be rewarded accordingly for their efforts.

Why does employee equity make sense?

#1 Aligns employee objectives with company objectives

Over time, workers can develop tunnel vision. They only think about themselves and their responsibilities. Rather than working for the company, they’re working toward their own advancement. Having equity in a company encourages employees to work with a long-term vision. When you give employees ownership, they know that what’s best for the company is also best for them. It might cause them to go above and beyond to help other employees. Many companies — big or small — have seen that they can encourage employees to think “outside the box” and come up with their own profit-generating and efficiency-enhancing ideas. Equity ownership raises the hopes of your employees that all of their extra efforts could pay off for them.

#2 Productivity is rewarded

You can’t watch all your employees all the time. When no one is watching employees to hold them accountable, they can be tempted to slack off and be unproductive. When employees have stock in a company, this tends to change. They suddenly have extra incentive to hold not only themselves, but also their co-workers accountable for their actions. They know that every moment of lackluster productivity could cost them money in the long term. Employees with equity in the company will work harder because they’re not just working for you, they’re also working for themselves.

#3 Morale improves

Stock compensation can also be a great way to make your employees happy. It’s even better than a cash bonus because it’s something only your company can give them. Employees need to have confidence in the company’s long-term outlook for this to work. Don’t give your employees stock to cover up company problems; do it to reward them for helping make the company a success.

#4 Unites the company

Too often, divisions can crop up in a company. Lack of decision-making ability and unequal compensation can cause divisions within companies, large and small. Giving employees equity in the company can make them feel as if there’s less of a divide. As owners, they tend to feel better compensated, more highly regarded, and more involved in the long-term strategy of the company.

What type of plan?

1) Equity benefit plan: In a company with only an equity benefit plan, employees receive an equity stake in the company, but they do not as a group, have voting control over the company. Such plans are often set up as a retirement or savings benefit and as a way to let employees in on the company’s equity growth while creating an incentive to stimulate productivity. In such plans, ultimate control remains with either a top manager or an outside owner.

2) Employee-controlled company: In an employee-controlled company, employees as a group have voting control over the company. Ownership may not even involve significant equity rights, but any outside owners are minority or non-voting owners. Employee ownership in such a company is a means of sharing control and dividing up corporate income among employees.

At this point, it would be very important to seek good legal advice to set up either plan. This is not something that you set up quickly. It must be well thought out, and obviously, tax implications must be considered too.

Southwest Airlines is a good example of how employee ownership works. The employees own roughly 13 percent of the company. The airline has posted profits for 40-plus years, while other airlines have not been as successful. Southwest Airlines encourages its employees to feel like owners and encourages them to share ideas with the company. Cory Rosen, co-founder of the National Center for Employee Ownership, says, “It’s not enough to just have an open-door policy; you have to have specific structures in place to facilitate the sharing of ideas. It’s not enough to just provide the financial benefit of ownership; you also have to treat your employees like owners.” If an owner isn’t prepared to do this, then giving your employees stock in the company will provide the proper incentive. It really is a shift to “We are all in this together,” instead of “You work for me, and I tell you exactly what to do each day.”

I like what Ray Atkinson has to say about employee ownership. As a key business consultant with ERP Consulting, he works with businesses on helping them reinvent themselves in many different ways. “Our customers get it,” says Atkinson. “They know they’ll get a better job done because everyone is a part owner of the company. That means we all have pride in our work. We’ll do our best and do everything to make sure our customer is a customer again. The thing is we are not just working for someone else; we are working for ourselves.” My hope is you feel the same way about the idea of employee ownership. It’s an opportunity for you to make your business more successful and your life easier because motivating your employees will be one less thing you will have to worry about. Make employee ownership a goal for your business. It will change it forever.

Jeff Sheets is the founder and owner of OPE Consulting Services. Whether a business is thriving or struggling to survive, Sheets’ rich experience in both the corporate and not-for-profit sectors allows him to partner with business owners to customize unique strategies for their needs. For the past 11 years, he has worked extensively with hundreds of outdoor power equipment dealers to create best practices in business structure, personnel management and financial profitability. For more information, he may be contacted at opeconsultingservices@gmail.com or (816) 260-5430. You can also follow him on Twitter @opeconsult, connect with him on LinkedIn, and visit his website at www.opeconsultingservices.com.