We all know the fundamental building blocks of the Great Game of Business®:
When it comes to that third step—providing a stake in the outcome—what’s the best way to do that? Two common choices include cash bonuses and equity sharing.
Many owners, especially those new to the Game, are skittish about sharing equity with employees. They can’t always put their finger on why it makes them nervous, but the reality is that using equity interests can be a great way to provide a stake in the outcome to your associates.
Paying out cash bonuses on a regular basis consumes cash that might otherwise be available to use on marketing efforts, new product development, or capital investments to support growth, so it's important to remember that cash is always a limited resource that has to be managed carefully. While options like profit sharing help to align interests, sharing in annual profits is not the same as a long-term equity interest.
Great Game practitioners that share equity ownership have seen that the interests of your employees will now be fully aligned with yours. But, is there real evidence of the effectiveness of equity sharing? Does it change how employees think about their company and, in turn, how they do their jobs? Yes indeed. More than 30 studies over the past 20 years have addressed the question of how employee ownership affects firm performance. So, what does the research show?
The jury is in: companies that establish employee stock programs experience a boost in business performance. A 2004 study found that companies that established employee stock plans saw an average increase in their return on assets of 5.5%, an increase in their net profit margin of 10.3%, and an increase in their return on equity of 5.6%. Looking at the data from all of these studies combined, the average estimated productivity difference between companies that share equity and those that don’t was 6.2%.
And consider: how does Jack Stack and SRC Holdings provide a stake in the outcome? You guessed it—stock is distributed to all the employees of the company. Says Jack: “Companies that don’t share equity are making a mistake.” Equity sharing may not be the best option for every company, but it is worth a serious look.
To learn more about ESOPs and better understand the challenges and options for owner exit planning, see what Martin Staubus has to share in his session at the 27th annual Gathering of Games.
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