By Damien Vira
What are the best strategies for aligning equity incentives for all stakeholders, and what lessons can be drawn from cutting-edge research in the area? How do you sustain broad-based employee ownership during organizational transitions? What are the equity trends in the U.S. and abroad?
Perched above the La Jolla Cove and overlooking the Pacific Ocean, few would argue that there is a more beautiful place to tackle those tough questions. From June 22-24—during the pristine first few days of summer—the Foundation for Enterprise Development (FED) hosted the Sixth Annual Beyster Summer Fellowship Symposium in La Jolla, Calif. http://www.fed.org/advancing-research-beyster-symposium
The conference brought together more than 50 interdisciplinary scholars and dozens of industry practitioners from across the globe, providing a forum for scholars to connect with one another and to collaborate with industry professionals.
At the Beyster Institute, we have witnessed firsthand how our clients have benefited from corporate stewardship, shared capitalism, and the resulting success of those firms that have built an ownership culture for their employees. Both individuals and organizations recognize that employees have a day-to-day vested interest in the profitability and income of their firm, but as conference speaker Robert Ashford of Syracuse University argued, their exposure is even greater. Professor Ashford said, "The biggest risk takers in the firm are the employees," and that the employees have the right to acquire capital with the earnings of capital.
Other researchers have conclusively demonstrated that broad-based employee ownership works for many different types of organizations (large and small, public and private). For example, symposium presenter Joan Bloom of Fidelity Investments cited recent survey results indicating that 52 percent of employees say broad-based plans make them more loyal, while 49 percent said it increases motivation. Therefore, as practitioners we ask ourselves how can an organization as well as the employees reap the benefits of an ownership culture and why is the public policy trend mostly working against it?
Both industry professionals and scholars at the symposium emphasized the importance of aligning the incentives of the firm and its employees as the critical component of successful plan adoption and continued participation. Examining international hurdles for adoption, specifically in Western Europe, Paul Arens of Monidee indicated that the participation rates in broad-based plans such as employee stock purchase plans range from 16-22 percent. These strikingly low participation rates are largely driven by tax policy; in most countries the shares have no voting rights and are taxed as ordinary income to the employee.
However, even in the U.S., broad-based plans are not very broad-based. Although there are over nine million employees participating in non-ESOP equity compensation plans, the plans continue to be scaled back. According to Kim Rifle of Aon Hewitt, only 25 percent of employees actually receive employer stock even though nearly 100 percent of publicly traded firms have a broad-based equity compensation plan. In order to investigate the drivers behind these low participation rates it is useful to gain perspective of how broad-based plans compare to other employee benefits. One oft-cited frame of reference is traditional 401(k) plans, which hold more than $3 trillion in assets, while broad-based equity compensation plans have only $1 trillion in assets. Industry professionals and academics posit that the catalysts behind the seemingly counterintuitive scaling back of broad-based plans include: a requirement that firms expense options, shareholder pushback, and lingering softness in the labor markets due to the Great Recession. In summarizing what many firms mistakenly view as the tension between shareholders' interests and employees' interests Dick May said it best, "Employees don't write checks, but compete against people who can." Overall, a firm's myopic focus on short-term performance is detrimental to employees and even long-term shareholders.
Unfortunately, most firms are only utilizing equity to attract and retain talent, while the primary beneficiaries continue to be senior executives. The result is disparate equity plans that vary by region, organization, and industry. For instance, Joan Bloom commented that life sciences companies in the San Francisco Bay area have broad-based equity participation rates nearing 90 percent. Despite the relatively high participation rates, employees still view equity as compensation and not as a long-term investment.1 Even though there is a plethora of research indicating broad-based plans lead to productivity improvements, increased employee engagement, increased loyalty, which all positively affect the bottom line, firms are still reluctant to adopt and properly communicate the plans.
In the process of sharing feedback and experience with other practitioners it was clear that overcoming the impediments described above and turning employees into partners does not happen overnight; instead it requires education, training, and the ongoing commitment of company leaders. From small family-led firms to Fortune 500® companies such as Southwest Airlines and Google, building a culture of shared capitalism maximizes return to the company through an energized, engaged, and high-powered employee stakeholder group.
Whether it was a discussion of the international and domestic hurdles faced by broad-based equity compensation plans, or the fascinating research of Berkeley Ph.D. Bo Cowgill who investigated the incentive effects of equity compensation at Google, the Beyster Symposium provided the impetus for practitioners and academics to exchange knowledge and experience. Being able to engage with both other industry professionals as well as academics is a rare opportunity, although its importance and the knowledge gained cannot be overstated.
On behalf of the Beyster Institute here at the Rady School of Management I want to extend our deepest gratitude to Mary Ann Beyster and the Foundation of Enterprise Development for inviting and hosting the symposium.
Damien Vira, 2015 Rady MBA candidate