Creating Employee Ownership Without Using Stock Options
Many organizations experiment with programs offering advantages of both ESOPs and goal sharing programs. One common aspect is the initial design process. Several key strategic issues are addressed during program design:
1) Short- and long-term results to be achieved
2) Employee efforts and behaviors needed to achieve these results
3) Eligible participants
4) How the program complements and supports current compensation philosophy and strategy
When creating an employee ownership goal share (EOGS) program, first define the program objectives. Objectives clarify why the program exists and what it should accomplish.
The ESOPs primarily provide an employee benefit directly related to the organization?s value expressed in stock value. Traditional goal-sharing programs focus on improving specific unit performance. The EOGS's objectives combine both. Eligible employees see an increased benefit based on organization financial success. Goals also focus on improving unit-based and organizationwide operational outcomes. Cash rewards are treated like stock.
One organization developed a program with "performance award" certificates issued annually. Exceeding annual margin targets funds the program. Allocation of awards is based on meeting or exceeding specific unit-based targets. Three levels of achievement are defined?minimal, target (expected) and optimum.
"Award" value is a percentage of incumbents' base pay. Minimal achievement provides a 10 percent of base pay award. Target achievement provides 20 percent. Optimum achievement provides 30 percent.
A three-year "vesting" schedule is used. At award grant, certificates can be redeemed for one-third of original value. In year two, an additional third can be redeemed. In year three, the final third can be redeemed. Margin targets must be met in subsequent years in order for that year's deferred payout to occur. Employees can use the award's cash value to fund Section 125 spending accounts.
All units and departments establish objectives utilizing the "balanced scorecard" approach. The EOGS reinforces the improvement of department or unit outcomes focusing on quality, customer, financial and human resources improvements. A specific goal related to each is established and given equal value.
Once primary circuit breaker funding targets are met, distribution is based on achievement of balanced scorecard goals. Unit and department-based objectives must be maintained at the threshold for the subsequent two years in order to obtain the deferred payout. Each missed scorecard goal reduces the deferred payment 20 percent.
This idea links employee actions closer to organizational strategic outcomes, creating a sense of ownership. With ownership comes organizational acceptance of employee involvement and empowerment.
Considering venturing into the world of employee partnership? Be prepared to address the dilemma of building morale while slowing down the decisionmaking process. An EOGS requires true employee involvement and empowerment, not just the appearance of such.