Employee Ownership

Adapting a powerful business strategy to attract and retain the next generation of talent

Sharing company ownership with employees — whether it’s intended to motivate, to retain or simply to share the wealth — can significantly impact a company’s success. Studies have shown that employee-owned companies boast faster growth, are more resilient in economic downturns and enjoy a competitive advantage over conventional rivals.

Why? According to the Harvard Business School Press book “Equity: Why Employee Ownership is Good for Business,” it is because effective employee ownership programs radically change the basis for collaboration between employees and managers and foster commitment to a whole new level of success for the business. Nearly 80 percent of the corporations on Fortune’s “100 Best Companies to Work For” offer some form of broad-based employee ownership, whether through employee stock ownership plans (ESOPs), stock options, stock purchase plans or profit-sharing. Employee-owned companies include everything from homebuilders to research and technology ventures, manufacturers to grocery stores and just about every other industry in between.

As we approach the imminent shortage of talent predicted by the management consulting firm McKinsey & Company in the study “The War for Talent,” could the prospect of ownership become a critical factor in attracting tomorrow’s best and brightest? Could it be the magic bullet that prompts A-players to fully commit their valuable skills to the success of the company? Could it even convince them to stay? The answer is no, not unless employee-owned companies modify employee ownership to appeal to the next generation.

Companies have created many different ways to unleash employee ownership’s capacity to increase productivity and loyalty and develop a team of driven employee-owners. Research has shown that what really makes it work is offering enough ownership to have a significant impact on employees’ financial future, helping people feel and think like the owners they are, and creating a shared understanding of the company’s performance and a common commitment to enhancing it. Building upon these established tactics, modifications will need to be made to attract the next generation of workers whose priorities and lifestyles are very different than those of their parents.

Eleven years ago when the original “The War for Talen,” study was conducted, the authors asserted that U.S. companies would struggle with a severe and worsening shortage of executive talent for decades to come. It determined that the most important corporate resource over the next 20 years will be talent: smart and savvy leaders for management and executive positions. With competition becoming more global, capital more abundant, ideas being developed quickly and cheaply, and workers willing to change jobs often, experts predict that talent is the only thing that will really matter.

The authors of the study also stressed that while talent becomes more important, its supply will decrease. In 15 years, there will be about 15 percent fewer 35- to 45-year-olds in the United States, while the economy is expected to grow by three to four percent per year. These numbers, along with the changing business environment, caused the authors to foresee an imminent talent war. They recommended making talent a priority at all levels, creating reasons for top talent to come, revamping recruiting strategies, creating development opportunities, and identifying and investing in A-players. Despite its potential impact, few companies promptly acted on the study's advice. An update of the study supported the prediction that the war for talent was indeed intensifying, and that companies that heeded the study’s advice and focused on managing talent delivered far better bottom-line results, outperforming their industries' means by 22 percent.

To develop a company culture that will attract tomorrow’s leaders, we must understand what the workforce wants. The “greatest generation” wanted careers that provided tangible symbols of loyalty, like a good pension; the baby boomers want personal appreciation; and Generation X is more concerned with having free time. The “Millennials” (born between 1979 and 1997) now entering the workforce are educated, ethnically diverse, technologically advanced and very collaborative. They grew up in the midst of economic uncertainty, war, terrorism, globalization and corporate scandal. They’ve seen their elders’ loyalty go unrewarded as a result of downsizing and are therefore wary of any assurances of financial security. They generally have close relationships with their parents and very high self-esteem. In a career, they want acknowledgement of their credibility, team-oriented work, and close contact with their supervisors. Like Generation X before them, they view their career direction as a work in progress and change jobs much more frequently than their parents and grandparents did.

Employee-owned companies are uniquely positioned to provide an environment in which the next generation of workers can thrive. They are more team-oriented than traditional companies, communication is a priority and ownership offers employees the prospect of significant financial rewards. However, the current setup of most ownership programs simply doesn’t mesh with the Millennials’ values and career goals.

Employee-owned companies often require new hires to work a minimum number of hours before being given ownership shares. Sometimes employees must be 21 before that time begins to accrue, and there may be a long delay before new hires receive information that shows their ownership interest. By the time the benefit of ownership becomes apparent, many Millennials may already be considering other career opportunities or regretting that they had turned down opportunities that may have resulted in more immediate financial gain.

The fact that shares are often allocated based on compensation and sometimes tenure can be a discouragement to high-performing young employees. On top of that, many employee ownership programs that are structured as retirement plans require employees to spend decades with the company before they have the option to cash in their shares.

Those terms may not have posed a problem for previous generations, but from a Millennial’s perspective, employee ownership will most likely add very little to what’s on the table. They might consider the benefits of ownership as too focused on the long-term and too unpredictable, but it doesn’t have to be that way. Getting creative with plan design, enhancing employee-owner education and encouraging more involvement can help make the employee ownership business strategy even more powerful in the next generation.

To start, employee-owned companies can eliminate their minimum-age requirement for ownership, shorten the hours of service required before allowing participation in the ownership program and offer early program entry dates. Shortening vesting schedules and permitting early diversification would make retirement-based ownership programs more transferable. Adding non-retirement-based ownership programs would allow younger employees to take advantage of the short-term benefits of ownership if they so chose. By making the above modifications to an employee ownership program, employees can think about their ownership as more portable and more accessible.

Although these practices are not yet widespread, some employee-owned companies — especially those with many young employees — have already felt the need for these kinds of changes and have proven that an updated program is achievable. They’ve decided that any issues of “fairness” among veteran employees aren’t worth sacrificing the continued success of their employee ownership program, as well as the success of the company, which is so closely tied to its ownership culture.

Educating employee-owners about the company’s finances and operations is an important part of making any ownership program effective, but in the next generation, that education also needs to include more guidance on planning for the future. Employee-owned companies can eliminate the mystery of their annual stock valuation by sharing a summarized version of the actual valuation report and building a sense of shared responsibility for that value. The company can also put ownership into context by providing details such as the stock price history and average account balance growth right in the employee-owners’ annual statements.

Employee-owned companies have much to offer the Millennials over traditional companies: a high level of employee input, more access to information, the opportunity to make a difference, celebration, recognition, participation, social justice and a stake in the outcome. If new hires are quickly integrated into an ownership culture which is invigorating and rewarding, it could break the cycle of short-term employment. When tomorrow’s workers feel valued and respected as real partners in the business, it could trigger the level of commitment and performance that we are told will define the next generation of successful companies.

The Beyster Institute at the Rady School of Management is dedicated to advancing the roles of entrepreneurship and employee ownership in building stronger, higher-performing organizations and economies worldwide.

The institute is nationally recognized as a leader in the field of employee ownership, contributing its expertise through research, publications and strategic consulting services. The Beyster Institute presents employee ownership outreach and development programs on-site and online, and partners with the National Center for Employee Ownership to present the national Employee Ownership Conference. The institute integrates employee ownership into the Rady School of Management curriculum by offering the first-ever MBA employee ownership course.

The institute’s international entrepreneurship programs develop leaders of business and civil-society organizations. Training is focused on experiential, peer-to-peer learning, and includes virtual and real-time information sharing, opportunities for collaboration and continuous learning through alumni networks. The institute also offers expertise in developing and managing centers for entrepreneurship, designing exchange programs and training educators in innovative methods of entrepreneurship instruction.

The Beyster Institute serves as the key center for entrepreneurial thought and activity at the Rady School of Management and is the only such university-based center to integrate employee ownership and entrepreneurship. Its offices are located in La Jolla, California, and Washington, D.C.

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