We think a good definition of employee engagement—real engagement—is employees who think and act like owners. Like businesspeople. Top companies foster this kind of involvement, sharing responsibility and rewards with people at every level of the organization. But there’s a sticking point here for a lot of otherwise sympathetic entrepreneurs: they don’t want to share equity in the business they have built. Is there any way to create that kind of ownership mentality without sharing equity? The answer is yes. But not forever.
To begin, let’s examine the link between owning on the one hand and thinking and acting like an owner on the other. It’s far from automatic. For example, we have observed many companies that establish an employee stock ownership plan, or ESOP. Some of these companies don’t help employees understand what ownership means. They don’t create methods for employees to learn about—and make decisions about—their part of the business. Not surprisingly, ownership has little effect on people’s attitudes and actions.
The same holds true for stock option plans, stock purchase plans, and the like. You can put equity in the hands of employees through any number of methods. Doing so might make people grateful for the extra compensation—and they may start to wonder when they’re going to get more—but by itself it won’t help them think and act like owners.
On the other side of the fence, we have worked with many companies that do not share equity but that have transformed themselves into organizations filled with businesspeople. Employees throughout the company take responsibility for their work, figure out how to save money, and come up with ideas for improvement. Said one CEO: “We don’t have employees any more, we have a plant full of entrepreneurs.
How to reach this happy state? Well, imagine that you were going to learn math. You’d start with the basics, addition and subtraction. Then you’d go on to multiplication and division, and finally you’d take up algebra and other advanced topics.
Learning the basics in business means learning how a company’s economics work in the short term—maybe a quarter or so. Where does the revenue come from? What are the costs? What would it mean for this company to “win”—to succeed—over the next three months? Once employees understand and agree on a metric of success and how they affect it, they’re on their way to mastering the basics.
When your employees understand how to drive short-term success, it’s time to involve them in the longer-term aspects of the business. Typically, this means an annual plan. The process is more complex. Market variables enter the picture. People need to be sure that they understand customers’ needs and the company’s competitive strategy. You may think your employees are not up to the task, but trust us, they are. They can help you put together a much stronger annual plan than you could produce on your own.
Once employees really understand and contribute to annual planning, you can move on to the real ownership issue: understanding what drives the company’s value over time. People begin to understand the “magic of the multiple”—the fact that every incremental dollar in profits translates to an additional $5, $8, or even $10 in the value of the business. They come to understand what a share of stock is, and how it can grow in value over a ten or twenty year period. That’s when they are really thinking and acting like owners. They take responsibility for the business, not just for their own jobs. No longer do you have to spend a lot of time telling them what to do.
But here’s where a problem can arise. Employees will see the value they are adding to your business. Eventually they will want to participate in that wealth creation—and they should, because the wealth is growing through their efforts. Here’s the point at which you have to share equity; otherwise people will feel taken advantage of. Sure, your ownership may be diluted. But if the dilution is 30% and the value of the business has grown 70%, you’re way ahead. Moreover, you are developing a natural group to sell your business to when the time comes. If you do that in the form of an ESOP, you also can realize sizable tax advantages.
We understand that many entrepreneurs are reluctant to share equity. And they can create “owners” without doing so, for a while. But not forever. If they focus on the value of their equity, they quickly understand that owning 100% of a company that is worth $3 million is not nearly as valuable as owning 70% of a company that is worth $10 million. Besides, the latter is more fun.