If you have ever gone down the employee share option plan (ESOP) rabbit hole you might never want to again. Everyone you talk to has a different opinion, usually strongly held. It can take up huge amounts of time and money.
I think the biggest mistake people make with this stuff is to be outraged that their employees think they should be given shares. When those employees haven’t taken any of the risks or put in the long hours. Employees are not sustained by your business dream, else they would start their own. You think your child is beautiful, they are helping you raise your child as a way to make a living, to pay the bills. They might think it’s cute but hand it back when they clock off. Businesses that view their shares as something everyone wants often give too much away because they just keep pulling on an ineffective leaver. You don’t want to be Mr. Ten Per Cent.
Let’s try to break it down a bit. Why would you give your staff options (not shares)?
- To reward people for short-term performance? – It can work but may not be the best way. If your sales come in above-target, that is dollars in your bank, probably best to pay a reward as dollars.
- To reward them when you don’t have the cash to pay market salary? – The problem with that is if you don’t have the cash they, probably quite rightly, won’t think it’s worth as much as you do. Probably better for you to increase sales than keep building it until they come.
- To encourage people to stay long-term? – What used to be called golden handcuffs – a bit like only training a dog with treats in my book, yes it can work but do they really love you?
- To reward people for staying the distance? – Absol(bloody)utely.
- To share in the success of the business? – You bet ya.
- Because their mates at the pub “have equity”? – Don’t discount this. In this day and age, it’s become a hygiene factor – most good businesses do it.
Well, that’s that then. Enjoy the rest of your day.
But that’s just the why. What about the what, who, how, when, and how much……(as Max Smart might say).
- Should you use shares or options? – Usually options but there are many exceptions.
- Who should you give it to? – Everyone that stays past a couple of years – yes even admin. You are probably not a 1950’s law firm if you are reading this. It always makes me shake my head that CEOS flying to Mars need “incentives” but people at the bottom are thought to be sufficiently engaged in “the culture” because of dress-down Friday and employee of the month.
- How should it vest? – Not quicker than the business grows and can afford to payout (this point is critical).
- How should you divide it? – Based on salary – again stay away from entrenching class systems in your business, salary is probably the least-worse measure of contribution you have. At least people will see that it is based on something concrete.
- How much? – There are many theories out there about this, both front and back bar arguments. Mine, for what it’s worth, is to have a 5% pool that will last you 10 years if you grow to your stretch plans. If you grow faster than that – beers all round.
If you are paying market salaries, paying bonuses for good performance, have great working conditions, and grant options over time, you are really just keeping up with the pack these days. If you want to delight and thank your people, do it in small unexpected ways as well. Just like bringing home flowers occasionally, it doesn’t have to cost a lot, it’s the thought that counts – but only once the big-picture needs are met. Else the flowers might just make things worse.