Following one of our mergers, I met with a few of our new partners one evening at Outback Steakhouse to address integration issues for the the seventy-five employees joining our organization. As I addressed our stock ownership plan, I was interrupted by the lead partner stating, "Our people won't be participating in that stock plan. There are two classes of people, partners and staff. Partners have equity and staff are blood-sucking leeches." The comment was so shocking that I assumed it was the gin martinis speaking, and I continued describing the plan until they stopped me again to reiterate their strong opinion. I remember thinking that this merger was going to be even more difficult than I had imagined, and it was. Unfortunately, this belief is widely held among small and mid-size business owners, and I want to explain why this strategy is only to their great detriment.
I believe we cannot build an exceptional organization without, at some point, allowing everyone to own stock in the mission, and I mean everybody. Depending on the nuances of our organization, "stock" may be public or private equity ownership, may be percentages of the limited liability company or partnership, may be a set percentage of the bottom-line profit, or it may be another creative structure which simply allows everyone to sit on the same side of the table.
This stock arrangement must also be finite and objective. It cannot be a subjective, year-end bonus allocution such as historically practiced on Wall street. These Wall Street annual bonuses can be two-to-three times an employee's salary, but they do not achieve the behavior and long-term goals of joint, actual ownership. These huge bonuses are simply tools to imprison workers with their own greed. Actual ownership breaks through this control and breeds empowerment.
Our stock plans must give a certain amount of ownership as a reward for performance, as well as permit especially-motivated teammates to purchase more shares on their own. Stock must be allocated based on performance, not longevity. This is not the American Federation of Teachers Union (AFT). Although, this is not to say that loyalty and commitment to the mission are not substantial variables in the performance calculation.
I hired Tom as a "Chairman Emeritus" for our firm to tap his substantial career experience for my own coaching needs, as well as to be a mentor and voice of wisdom for our growing force of financial advisors. Tom asked to speak to the entire company at our annual retreat in Nags Head, North Carolina, where he told a valuable story from his career with the successful regional brokerage firm, Wheat First Securities. Every time stock ownership in the company was available, Tom ensured that he qualified for the largest allocation possible, and then he postponed consumerism instant gratification to instead use the bulk of his discretionary income to buy more company stock. We laughed at his recount of the debates with his beautiful wife about buying more stock instead of new living room furniture. Yet, his message was powerful as he had just turned 50-years old, cashed out, bought a luxury RV and was now taking his wife to see the country and spend quality time with their large family. They now controlled their own destiny.
We will never become wealthy and independent by making large annual incomes. Half of it goes to taxes, and the other half supports our ever-increasing lifestyle. High income earners have big homes with big mortgages, leased BMW's in the driveway, kids in private schools, and epic husband and wife weekly fights over money. Equity owners every year build net worth, not income, and most of their growth is tax-deferred, which has a tremendous compounding effect. Even Albert Einstein stated, "Compound interest is the eighth wonder of the world. He who understands it, earns it...he who doesn't...pays it." You and all of your teammates must have equity to gain freedom, choice, and eventually peace. There are even brilliant strategies to treat your LLC income as a Subchapter S Corporation for tax purposes, avoid socialist FICA, and pay taxes at low corporate tax rates instead of the much higher top personal brackets (Another Post).
Now be prepared for the C-Player who has snuck into your organization and believes your attempt to spread the wealth with company stock is a fascist ploy to control the masses and extract more wealth for the owners. Always remember that in capitalism, no good deed goes unpunished by the insecure and the misguided. I recruited a longtime friend to join our company from Morgan Stanley, with the intention of eventually having him join the executive team for our rapidly growing firm. But, when I later learned that we would have an employee revolt if I promoted this individual, I knew this would not end well. This scorned teammate quickly became poisonous in the ranks, and one of his targets was our stock-equity plan. He attempted to convince others that it was not a benefit, the pricing was wrong, and management was attempting to manipulate the employees. I ended up slicing off a $50 million book of business and allowing this teammate to set up his own independent practice outside our company to ensure I removed him from the impressionable A-Players, but he released much poison before he left. Don't let these people stop you from setting up win-win stock plans for your organization which will have dramatic impacts on peoples' lives.
These plans do take a lot work, but as we always say at JAM Views, "Don't be mentally lazy!" Ensure you have the legal, compliance, and tax functions buttoned up tightly. But, don't blindly follow what the attorneys and accountants initially propose. They are not creative thinkers. You know your people, and you know your specific, long-term goals, so give these technicians all the issues and ideas and then have their legalese make it work within the system. There are many issues to address, such as vesting schedules, expiration dates, and liquidity, but don't let the complexity scare you away. You will figure it out, and it will be worth it!
Employees who own stock forget about time clocks. They can now see the big picture. They understand why it is important to hit monthly, quarterly, and annual targets for themselves and for everyone else. They pay close attention to quality metrics such as product failure rates or customer satisfaction surveys. They become extremely cost conscious and don't sign up for the latest boondoggle conference in Scottsdale. They save money on the small items like the postage machine, supplies, and useless advertising. They show up to the local charity 5k's sporting their company logo gear, and they drag their spouse to the community events to chat up prospective new customers. And, most strikingly, they cull the herd of all the C-Players before you ever have to say a word. I'll never forget one operations meeting when a junior teammate, who had recently joined the company stock plan, shouted about a troublesome sales associate, "He's either making us money, or he's costing us money. He has to go!"
If you need to convince fellow partners to implement a stock plan, just use simple math to appeal to their greed. If a growing company is increasing its equity value by 10% per year, and the owners allocate 20% of the company stock to employees, then the partners would have to work only two more years to reach the same personal equity valuation target. But, there is a much higher probability that to achieve this same value they will not only not work an extra two years, but will actually work three years less due to everyone now rowing in the same direction.
Finally, always remember that with return comes risk. After fortunately building much wealth for a large number of employees and clients through numerous equity arrangements, we also experienced a terrible result with one of our investment company's equity. The government intervention and legal battle severely damaged the value of certain equity shares for a period of time. I am confident it will be restored, but time frames can get extended. So, of course, always be diversified as you are building and executing your life plan.
Give everyone stock. It is always the right answer.
"In the midst of winter I finally learned that there was in me an invincible summer." - Albert Camus
