Making your Workers your Partners
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There is an inherent conflict between owners and managers of companies. The former want, for instance, to minimize costs - the latter to draw huge salaries as long as they are in power.
In publicly traded companies, the former wish to maximize the value of the stocks (short term), the latter might have a longer term view of things. In the USA, shareholders place emphasis on the appreciation of the stocks (the result of quarterly and annual profit figures). This leaves little room for technological innovation, investment in research and development and in infrastructure. The theory is that workers who also own stocks avoid these cancerous conflicts which, at times, bring companies to ruin and, in many cases, dilapidate them financially and technologically. Whether reality lives up to theory, is an altogether different question.
A stock option is the right to purchase (or sell - but this is not applicable in our case) a stock at a specified price (=strike price) on or before a given date. Stock options are either not traded (in the case of private firms) or traded in a stock exchange (in the case of public firms whose shares are also traded in a stock exchange).
Stock options have many uses: they are popular investments and speculative vehicles in many markets in the West, they are a way to hedge (to insure) stock positions (in the case of put options which allow you to sell your stocks at a pre-fixed price). With very minor investment and very little risk (one can lose only the money invested in buying the option) - huge profits can be realized.
Creative owners and shareholders began to use stock options to provide their workers with an incentive to work for the company and only for the company. Normally such perks were reserved to senior management, thought indispensable. Later, as companies realized that their main asset was their employees, all employees began to enjoy similar opportunities. Under an incentive stock option scheme, an employee is given by the company (as part of his compensation package) an option to purchase its shares at a certain price (at or below market price at the time that the option was granted) for a given number of years. Profits derived from such options now constitute the main part of the compensation of the top managers of the Fortune 500 in the USA and the habit is catching on even with more conservative Europe.
A Stock Option Plan is an organized program for employees of a corporation allowing them to buy its shares. Sometimes the employer gives the employees subsidized loans to enable them to invest in the shares or even matches their purchases: for every share bought by an employee, the employer awards him with another one, free of charge. In many companies, employees are offered the opportunity to buy the shares of the company at a discount (which translates to an immediate paper profit).
Dividends that the workers receive on the shares that they hold can be reinvested by them in additional shares of the firm (some firms do it for them automatically and without or with reduced brokerage commissions). Many companies have wage "set-aside" programs: employees regularly use a part of their wages to purchase the shares of the company at the market prices at the time of purchase. Another well known structure is the Employee Stock Ownership Plan (ESOP) whereby employees regularly accumulate shares and may ultimately assume control of the company.
Let us study in depth a few of these schemes:
It all began with Ronald Reagan. His administration passed in Congress the Economic Recovery Tax Act (ERTA - 1981) under which certain kinds of stock options ("qualifying options") were declared tax-free at the date that they were granted and at the date that they were exercised. Profits on shares sold after being held for at least two years from the date that they were granted or one year from the date that they were transferred to an employee were subjected to preferential (lower rate) capital gains tax. A new class of stock options was thus invented: the "Qualifying Stock Option". Such an option was legally regarded as a privilege granted to an employee of the company that allowed him to purchase, for a special price, shares of its capital stock (subject to conditions of the Internal Revenue - the American income tax - code). To qualify, the option plan must be approved by the shareholders, the options must not be transferable (i.e., cannot be sold in the stock exchange or privately - at least for a certain period of time).
Additional conditions: the exercise price must not be less than the market price of the shares at the time that the options were issued and that the employee who receives the stock options (the grantee) may not own stock representing more than 10% of the company's voting power unless the option price equals 110% of the market price and the option is not exercisable for more than five years following its grant. No income tax is payable by the employee either at the time of the grant or at the time that he converts the option to shares (which he can sell at the stock exchange at a profit) - the exercise period. If the market price falls below the option price, another option, with a lower exercise price can be issued. There is a 100,000 USD per employee limit on the value of the stock covered by options that can be exercised in any one calendar year.
This law - designed to encourage closer bondage between workers and their workplaces and to boost stock ownership - led to the creation of Employee Stock Ownership Plans (ESOPs). These are programs which encourage employees to purchase stock in their company. Employees may participate in the management of the company. In certain cases - for instance, when the company needs rescuing - they can even take control (without losing their rights). Employees may offer wage concessions or other work rules related concessions in return for ownership privileges - but only if the company is otherwise liable to close down ("marginal facility").
How much of its stock should a company offer to its workers and in which manner?
There are no rules (except that ownership and control need not be transferred). A few of the methods:
- The company offers packages of different sizes, comprising shares and options and the employees bid for them in open tender.
- The company sells its shares to the employees on an equal basis (all the members of the senior management, for instance, have the right to buy the same number of shares) - and the workers are then allowed to trade the shares between them.
- The company could give one or more of the current shareholders the right to offer his shares to the employees or to a specific group of them.
The money generated by the conversion of the stock options (when an employee exercises his right and buys shares) usually goes to the company. The company sets aside in its books a number of shares sufficient to meet the demand which may be generated by the conversion of all outstanding stock options. If necessary, the company issues new shares to meet such a demand. Rarely, the stock options are converted into shares already held by other shareholders.
Never befriend your employees or socialize with them. If you ignore this advice, they will begin to regard you as one of them and instead of looking up to you, they will envy and resent you for your "luck" in having acquired your enterprise and your wealth.
Passive-aggressive behaviors will soon follow, culminating in outright hatred and sabotage. Keep clearly demarcated boundaries and eschew faux egalitarianism and ersatz camaraderie.
This is especially true in highly competitive buyers' markets where your employees can easily defect to your adversaries, replete with years of skilling, your client list, and intellectual property. Maintain the minimum necessary investment in your staff and never ever spoil them or raise their expectations for special treatment and their narcissistic sense of entitlement. Pamper your clients instead.
Always have backup personnel at your beck and call. Attempt to automate the business. Subcontract. Outsource. Keep your workplace lean and mean: proffer tough love, cultivate a modicum of awe or even fear and lots of uncertainty and abandonment anxiety in order to curb staff mobility. Be generous and respectful, not stingy and abusive. But be the boss, not a follower. Your employees expect you to lead them, not only to consult them. Seek feedback, your door always open, but remain the sole decision-maker.
Position your brand as high-brow or low-brow but never as "hi, bro". Middle of the road brands are road kill waiting to happen. Overcharge. Flaunt exclusivity and elitism if you can get away with it.
Maintain a backup of everything on the cloud. Trust no one, supervise everyone. Work as hard as your least employee but never be ostentatiously virtuous. Don't rub your status in, but don't be falsely modest or frugal. Give your workers an example to emulate, not to tear down. Do not frustrate, triangulate, and divide. Conquer instead.
Also Read:
The Labour Divide - V. Employee Benefits and Ownership
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