change

One of the questions I’m asked on a regular basis is whether our clients should give stock to their key people.  Many private business owners believe that if they give their managers stock, those key managers will take a more active “ownership” interest in the company.

Let’s examine whether this actually is true.

Most of the time actions don’t change.

For the most part I’ve found that this belief is false.  Managers who are given stock don’t often take an ownership interest.  Whether a key person owns stock or not has little to do with how they act towards the company.

If a key person is pre-disposed to act like an owner, they will do so whether they own stock or not.  My observation has shown me that key employees behavior towards the company is not based on whether they own stock.

Instead, I find that key people’s actions are based more on their worldview about work and what sort of environment the owner has established in their company.  For a key person to act like an owner, they must be treated like an owner.  And, this has nothing to do with stock ownership.

Do you let your key people make mistakes?

Key people must be allowed to make decisions and make mistakes.  Your people must be allowed to control their work environment and how they go about doing their job.  Owners who allow employees to control their work tend to have more involved employees than owners who like to control what, when and how work is done.

I’m a big fan of having performance guidelines established and then have staff members set their own strategies for how they will achieve success in their jobs. Allowing your staff to have personal control about how they spend their time is usually a better motivator than stock ownership.

But I really want to have others share ownership in my firm.

I get it.  You want to tie down your key people and you want them to be involved in the success or failure of your firm.  If this is what you really want to do.  Here are some things for you to think about:

  1. Have clear rules for who gets to own stock and what actions they have to do to become eligible for stock ownership.
  2. Make sure your key people buy stock.  When you give stock there is little value to the person who receives it.
  3. Be willing to treat new shareholders like true partners.  This means you’re going to have to discuss key initiatives before they happen.
  4. Have a no fault divorce as part of the agreement.  Have a period where if things don’t work out on either side there can either be a put or call on the shareholders stock.  The call and put price is the same price the stock was purchased.
  5. Have some requirement for new shareholders to be involved and creating new business for the firm.  I believe that if you can’t create business then you shouldn’t allow an associate become an owner in your firm.

This is a really complicated area of business planning.  It’s also one I love to talk about.   With that in mind I invite you to schedule a time to talk if you’re really thinking about sharing ownership with others in your firm.  The time we spend together will pay for itself many times over.

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Topics: business exit planning, shared ownership, stock ownership, employee motivation

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