Building Unified Financial Visions

Okay, so it may not be THE question–Shakespeare had a better one I suppose.  But it certainly is a frequent question we are asked, particularly by leaders of closely-held businesses.   Should I offer equity or not?

It is probably self-evident that there is no right answer  to that query.  We have private company clients that share equity and public company clients that don’t.

The better question would be: what results are you looking for and will sharing equity help you achieve them?  Once you know the answer to that question, you can more clearly assess whether or not a stock plan of some type is in order.

Compensation planning is an outcome-based endeavor.  Any plan you implement should have a strategic purpose and  impact behavior.  So, as you consider whether or not to give stock, first consider what behavior you are trying to impact.  Here is a list of possibilities:

• We want people to think and act like owners as they make strategic decisions
• We want to drive higher revenues this year
• We want to create a long-term focus and not just a short term focus
• We want  key people to stay for the long-term
• We want our employees more focused on profit
• We want a faster delivery system
• We want to expand our product line
• We want to reward long-term productivity
• We want to broaden the ownership pool

Not every outcome on this list would be a reason to implement a stock plan of some type.  Some of the issues here have to do with getting results right now–this year.  So, the first decision you need to make is whether you are trying to address short range performance issues or long range ones.  If both, you need to determine how to balance the two through the combination of incentive plans you engineer.

Once you have become clear on those priorities and the strategic results you’re looking for, you can then consider other important questions that will lead  to an informed conclusion.

• Do we want to grant equity?  Doing so expands ownership, dilutes the equity of current shareholders, expands access to financial data and so forth.  Are we ready for that? Do we think that expanding the number OF shareholders will likewise expand the ultimate value FOR shareholders.
• Is there a market for our stock?  If we’re closely held, likely not.  What kind of barriers does that create?
• Are we considering equity because we have key people that are asking for equity?  If so, is the underlying issue really more about receiving appropriate remuneration for value created rather than receiving stock or not receiving stock?  If so, perhaps other alternatives will satisfy that need.
• Have we considered alternatives to stock that create a similar outcome–such as phantom stock, performance unit plans or profit pools?
• Should some kind of cash based long-term incentive be considered instead of an equity plan?  What result are we looking for?  If it’s profit related (increased net income, EBIDTA or other measure), is there a better way to drive that result?

One of the ways we help clients address such questions is through a decision tree process.  Organizations considering an equity plan should engage in a similar process before enlarging the ownership circle within the business.

In summary, if you are trying to answer the equity sharing question in your organization, start first with the results you are looking to achieve.  Those outcomes should guide your next steps.