To Share or Not to Share: The Great Pay/Stock Trade-off

Talk about change... did you hear the one about those folks in Silicon Valley? Seems like they discovered a powerful way to motivate all of those gifted killer-app developers on their staffs - a way that was tried and tested by none other than King William, the Gates: stock options for all (or nearly all)! The formula is simple and makes a lot of sense: limit fixed costs (salaries being the biggest chunk of knowledge-hungry organization's expenses) by keeping pay to affordable levels while enticing workers with visions of riches beyond their wildest dreams via stock grants (outright gifts or purchase options) at no immediate cost to the company. And do this, not just for the very top echelons of the organization, but for all, or nearly all, of the company's human resources.

The idea is beautiful, especially for entrepreneurial, green field companies who are short on cash and long on vision. What better way to motivate people to achieve excellence than with the promise of shared wealth? What better way to ensure outside shareholder confidence than the comforting knowledge that the people who work for the company - at nearly every level - stand to gain or lose right along with investors? What better way to engender loyalty, commitment, teamwork, excellent performance and, ultimately, profitability? And to do it all without draining away precious capital! The only way that this strategy would fail would be if:

  • the stock under-performs, making the employee share-holders feel sold out; or
  • the company grows too large, and employees lose sight of the relationship between their performance and stock performance; or
  • outside shareholders are threatened by employee share-holders' conflicting interests (e.g., downsizing; compensation levels), or
  • employees' base salaries fail to keep them whole; or
  • employees believe their efforts to influence stock price are overshadowed by external forces.

Believing that the model would work-had to work-fledgling, high-tech organizations handed out stock as freely as the cola, coffee and pizza powering the unclocked hours of employee creativity. And work it did, as hundreds of happy Microsoft employees will testify. At this writing, however, a lot of smiles have turned into frowns. Cyberland has moved into uncertain times. Stock prices for a number of high-tech startups have been falling, along with the faces of a multitude of workers whose long-term hopes and dreams rest upon a lucrative spread between the purchase (grant) and sale prices of their shares.

Like the South, stock prices will rise again (for many, if not for all), and many workers will be whole again. But companies who have been standing in the wings, waiting and watching, will remain a bit skittish about the broad use of stock incentives in variable pay programs. They want to know if employee stock ownership will really increase company performance and profitability. In other words, is the gain, if any, worth the cost and the bother? Very few studies have been conducted that include both employee stock ownership and company performance as variables. Those that do include both variables show a positive correlation between them, but not necessarily a causative relationship. Analyses, instead, show a persistent triangulation between: 1) employee participation, 2) employee ownership and 3) company performance. So, until we hear of a definitive study to the contrary, don't expect broad-based stock grants, alone, to impact your bottom-line. You must also:

  • Communicate openly, effectively and continuously with your employees.
  • Reward your employees for things that they can actually affect.
  • At a minimum, actively seek and consider input from all of your employees; ideally foster a robust employee involvement culture.
  • Take the pulse of your employeesí attitudes frequently through surveys and informal feedback.
  • Continuously reevaluate all of your HR policies and programs in light of the information you are gathering.

At Stern & Associates we work with our clients in designing dynamic employee motivation and reward systems, including stock-based incentives where appropriate. It is just good business!