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Transforming employees into shareholders may not be a good idea

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Logic would tell us that offering shares of your company to your employees (assuming they are offered at a good price) should clearly boost performance and allow the organization to achieve exceptional results. After all, wouldn’t most people work harder, reduce inefficiencies, increase their performance and chase sale leads once they become shareholders?

Turns out logic does not necessarily prevail in this situation and results may not be extra-ordinary.

Let me share with you our not-so-successful experience.

Our experience

I’ve already stated that Pyxis is an experimental laboratory and like many people, we understand that money by itself is not a good motivator. We also believe that sharing the wealth with the people who contribute toward achieving the business results is not only a good idea, but it is for us a morale obligation.

So at the end of 2007, the founder and then CEO agreed to sell 25% of his shares to the employees with the intend to increase performance and share the resulting wealth – in addition to using it as an employee retention strategy. At the time, almost 100% of the employees created a cooperative to own shares of their company. It is important to specify that our province offers important tax credits to employee-owned cooperative – which was an important driver in creating a cooperative.

The conclusion after more than 3 years of having employee-shareholders is that the intend and the objectives were right but the way to achieve them weren’t done right. Why is that? I asked myself.

Below are my conclusions but before we get into those, I believe it is important to understand the distinction between being an employee and being a shareholder.

What is an Employee?

An employee contributes labor and expertise to an endeavour. Employees perform the discrete activity of economic production. Of the three factors of production, employees usually provide the labor.

Specifically, an employee is any person hired by an employer to do a specific “job”. In most modern economies, the term employee refers to a specific defined relationship between an individual and a corporation, which differs from those of customer, or client. Wikipedia

What is a Shareholder?

A shareholder or stockholder is an individual or institution (including a corporation) that legally owns one or more shares of stock in a public or private corporation. Shareholders own the stock, but not the corporation itself. Wikipedia

Clearly, there is a distinction between the role and contribution of an employee versus that of a shareholder. For one thing, transforming employees (with their behaviors and attitudes) into full-fledged active shareholders doesn’t happen over-night. To be honest, it still didn’t happen after over 3 years for almost 1/3 of the employees. Did we hire people who were not driven by results? Well, maybe for a couple of people but certainly not over 30% of the people. So why is it that results didn’t go through the roof?

After much analysis of the situation and heated debates, I believe there are a few reasons why transforming employees into shareholders didn’t give outstanding results:

  • Creating a cooperative has a non-capitalistic connotation: People who initiated the process of selling shares to the employees also wanted to implement a coop as a way to distribute wealth. Unless our implementation of a coop is very different than elsewhere in the world, many people understood a coop to be a non-profit driven initiative and as such, acted accordingly. Having a coop own 25% of the shares led to non-capitalistic behaviors and consequently slowed down growth and profitability.
  • Becoming an active shareholder isn’t the norm: Unless you have owned and operated a business in the past, the notion of becoming an active shareholder isn’t easily understood by most people. Many people – still to this day – ask themselves what it means to be a shareholder and how they should act differently. Transforming employees into shareholders is an educational process and unless you invest in training people what it means, the transformation will not give great results.
  • Lacking entry criteria brings performance downwards: Since everyone got access to shares without exception, there was no motivation to increase performance – why work harder than the next guy when the results are shared equally. On the other hand, when past performance is used to determine who gets the privilege to own shares, individual and collective performance is increased and as a consequence, the overall performance of the organization goes North.

Consequently, attempting to transform employees into shareholders overnight was a mistake in our case. If we had to do it again, I would still give employees the opportunity to own shares but it would be done according a different approach:

  • Owning shares is a privilege and would be based on past performance;
  • Allowing employees to own shares would be done in small increments, and annually (let’s say x% per year);
  • Potential shareholders would need to demonstrate their understanding of what it means to be an active shareholder and would need to agree to certain protocols;
  • The percentage of available shares would be results-based – the better the organizational results, the more shares would become available.

Based on this experience, I would gladly grant shares to employees who clearly understood the meaning and responsibilities of being an active shareholder and who have demonstrated (and are still demonstrating) outstanding performance. Otherwise, there is no wealth to share…

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