Modern business is obsessed with innovation and securing the talent that will give it a competitive advantage. Consequently, as I’ve written previously, growth-minded companies need to build value propositions that will attract entrepreneur-oriented “catalysts.” By and large, this means finding effective ways to share value with those who help create it.
“Catalysts” are individuals who, in a previous era, were the people you’d find in their garages creating their own businesses. After doing so, they would go out and creatively disrupt larger players. Now, these game changers are being hired by existing companies that want to stay ahead of the innovation curve. However, to attract them, a business has to offer that kind of talent something that makes them feel like owners. These are individuals who want to participate in the wealth they help generate. In fact, if they aren’t offered a value proposition that does this, they’ll go out and start their own enterprises. Smart businesses recognize this, but struggle with the right way to make it happen—where something is offered that satisfies both owners and the “catalysts” they want to attract.
Many organizations—especially private companies—assume they need to share stock to address this issue. Most don’t realize there are many alternatives to equity sharing that will meet this requirement. The starting point is recognizing that what key producers are seeking is participation in the growth they help create, not necessarily to receive equity—though some may initially request it. Even if they ask for stock, what they are really doing is communicating an expectation that there be a compensation formula that defines the financial partnership they will have with the company—long term. That may be stock but it could just as well be phantom equity, a profit pool or some kind of strategic deferred compensation plan.
Ultimately, there are about nine different types of long-term incentive or value-sharing arrangements a company can consider to address this need. The key to finding the right plan is in knowing the right questions to ask. Leadership needs a “decision tree” process that will lead it to the right conclusions about plan choice. Asking the right questions leads one to eliminate certain plans and gravitate towards others.
Another way of approaching this decision process is to perform an assessment such as the one below. (Examine each statement and then choose the response that best represents your organization’s current thinking.)
- I am willing to share stock with key employees. Strongly Agree Agree Neutral Disagree Strongly Disagree
- I want to tie the reward to company value without giving away real equity. Strongly Agree Agree Neutral Disagree Strongly Disagree
- I want to reward for both past performance and future performance. Strongly Agree Agree Neutral Disagree Strongly Disagree
- I want the reward to be based primarily if not solely on future performance. Strongly Agree Agree Neutral Disagree Strongly Disagree
- I want employees to achieve a certain performance level before any benefit is earned under the plan. Strongly Agree Agree Neutral Disagree Strongly Disagree
- I want the value of the plan based primarily on the profitability of the company. Strongly Agree Agree Neutral Disagree Strongly Disagree
- I want to base value sharing primarily on key performance metrics rather than the value of the company. (Profits may be one of the metrics.) Strongly Agree Agree Neutral Disagree Strongly Disagree
- I have a fairly large group (10+) for whom I want to provide this benefit. Strongly Agree Agree Neutral Disagree Strongly Disagree
- I want to provide this plan for all levels of employees in the company. Strongly Agree Agree Neutral Disagree Strongly Disagree
- I want the benefit to be paid out in the following timeframe: 2-4 years 5-8 years 8+ years Upon the sale of the company
- Owners have defined a time period within which they plan to exit the business. No 1-5 years 6-10 years 10 years+
As you work through that assessment, you can see there are a multitude of issues that need to be considered if you don’t want to end up with unintended consequences in building out a long-term value-sharing plan. Likewise, there are certain approaches that will automatically be considered or discarded based on your response to given statements. For example, if you don’t want to share real stock but you do want to tie the benefit to the value of the company and you only want to give away future value, you are not going to be installing a restricted stock plan. Instead, you will probably being considering a type of phantom stock arrangement such as a stock appreciation rights plan (sometimes called a phantom stock option plan).
Regardless of the technique a company uses to evaluate plan options, the critical issue is that high performing talent will expect a financial partnership with the company that appropriately and effectively shares value with those who help produce it. In short, it is not an issue that can be ignored if a company wants to win the talent wars and maintain a competitive advantage in the high innovation business environment that currently exists. And that focus on innovation and competition isn’t going away—it’s only going to intensify.