Turning Your Employees Into Owners
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In today’s WSJ there was an article titled “Amid Crackdown, Some Firms Rethink ESOP Sales Practices” which relates to owners rethinking how to sell to employee-stock-ownership-plans (ESOP) following a crackdown by the Labor Department.  It seems to me we are missing a piece of important information in the ESOP relationship that allows the new owners to make an informed decision.

The Basics:  When a founder or majority shareholder wants to liquidate their closely controlled shares to their employees, one option is an ESOP.  In this scenario, a trust is created that will hold the company shares.  The value of these shares is determined by an outside appraiser.  The purchase of these shares may be funded by the employees’ retirement savings account.  In my view, the premise of this structure is that the employee is not capable of making an informed decision.  A trustee is hired (often an outsider and, with the recent crackdown, a likely choice to protect the business owner) to protect the workers’ interests and a third party valuation firm is hired to determine a value.  It seems to me that if employees have a working knowledge of the organization that includes the institutional knowledge and business savvy, they are qualified to make their own decisions.  If they don’t, are they really qualified to be an owner?

What If:  I would submit that an employee team that has the information necessary to make an informed decision regarding the purchase of their company results in a better outcome for both the current owner and the future owners.  An ownership group that is informed will be equipped to capitalize on the historical successes and lead the firm well into the future.  This means today’s owners need to invest time and resources in the future owners by passing on the institutional knowledge and business savvy to the next generation of leaders.  By institutionalizing this knowledge and getting it out of the leader or founder’s head, it will make the company more valuable not only in the owner’s eyes but in those around them.

The WSJ suggests that the Labor Department has observed that the value of a firm may be set to meet some predetermined expectation on the part of existing owners.  This could be viewed as a one-sided negotiation that a willing participant would never accept when buying a car or home.  Why should we consider it when buying a business?

The ESOP is to be used as a financial and legal tool to facilitate the completion of a business relationship between competent, knowledgeable parties.  It should not be used as a tool to manipulate terms and conditions based on a lack of knowledge or transparency.  As business leaders it is our duty to pay it forward by developing a team of leaders and owners that have a sustainable financial foundation to lead the company into the future.  It should not be our priority to squeeze every cent out of the transaction by taking advantage of our position.

As the CEO of an engineering firm in the a creative market segment, I felt one of my primary roles was to find the best possible people, provide the best possible tools and get out of the way.  The traditional business practice made this challenging.  For example, a qualified candidate for a leadership position would often have an advanced degree and a professional license to practice in the design industry. When we would bring them into the typical engineering firm, we would ask them to clock in and clock out and account for every moment of their day.  The reality was we were treating these highly trained industry professionals like a teenager at their first job with a fast food chain.

I submit this arcane legacy of micromanaging the best of the best has little or no benefit and may be actually driving away your best talent.

One morning I traveled to an architect’s office to prepare for an interview later that day.  When I went into the CEO’s office, it looked like a ticker tape parade had just passed through.  Paper was all over the place. I commented on what appeared to be a significant research project that was underway.  The response was “no.  I am doing my time sheet.  It is more of an art than science.”

Given this feedback, I often asked other firm leaders if they do timesheets and why.  The vast majority required detailed timesheets and most admitted to fixing the numbers to make them work.  Is there anything more demoralizing than asking a highly educated and trained individual to report back like a small child while supporting a culture that requires fixing the numbers to achieve a desired outcome?

Daniel Pink, author of Drive, observes that a financial reward system only works in jobs where mechanical skills are critical.  When cognitive skill are required, high financial rewards lead to poorer performance.  For these roles he recommends paying people enough so money is not an issue.  Once the basic financial need is met, the professional will be attracted to a firm that provides autonomy, mastery and purpose.

So what did we do…we did not do time sheets unless absolutely necessary for a specific project.  We created a shared fate reward system where the entire team succeeded or failed together.  We invested heavily in tools that provided timely and accurate information to the team members (autonomous and mastery) so they could support their clients.

As business leaders, our role is to be educators, nurtures and observers.  By being predictable leaders, the team was able to focus on the customer and the business.  This culture of empowerment attracted the best of the best and gave them the freedom to do their best work.

 

2013 – 2014 surveys provide the following picture of today’s workforce.

  • 70% of employees say they are motivated to do their very best1
  • 57% would recommend their organization to others as a good place to work1
  • 27% intend to seek employment elsewhere1
  • 50% report that the organization values employee recognition1
  • 40% report sufficient opportunities for advancement1

How is your organization measuring up?

Team members are increasingly becoming more important for US business.  In the 1930’s, 76% of GDP was outside the service sector.  A majority of business was focused in manufacturing where the deliverable was often a product of a machine.  These machines delivered the same result day in and day out.  When they broke we fixed them and they continued on.

Today, 68% of the U.S. GDP or 4 out of 5 jobs is from the service sector2.  These services are generated by human beings that have the power to think.  The 1950’s management style of “When I want your opinion, I will tell you what it is” will no longer work.  Hence, the results of the above survey where we find an alarming number of our team members turn off their brains when they come to work.  As leaders, it is our job to nurture, educate, and provide opportunity to expand their horizons.  Investing in the team is the only way to grow and expand our companies and success.  Change can be scary, but a requirement for survival.

As business leaders we are often distracted from our primary task of working on our business by the constant firefighting of today’s emergencies.  However, we must focus on the important and not just the urgent.  To get more out of our team members, we must:

  • Replace short term reaction with long term planning.
  • Focus not on how many we make, but how well we make them.
  • Institute a culture of leadership and not supervision. Leadership focuses on process, supervision focuses on targets.
  • Sharpen the saw – institute education and self-improvement for everyone.
  • Convert individual knowledge and experiences into institutional knowledge. The worst place to store business information is in the human brain.

Edward Deming’s work found that 94% of all problems in the workplace are problems not with the workers, not with performance, but with the system.  By focusing on the processes and systems that deliver repeatable outcomes, we are able to continually sharpen the saw with a passion for continuous improvement that results in an engaged team, corporate growth and individual success.

 

 

1   American Psychological Association, Psychologically Healthy Workplace Program; APA’s 2014 Work & Well-Being Survey; U.S. Department of Labor, Bureau of Labor Statistics.

2   Office of the United States Trade Representative