ESOPs As a Motivational Tool

We need to address common misconceptions about stock shares. Many individuals buy and sell stocks on the stock market and tend to equate them with cash or near-cash. After all you can sell them at any time. No one except the very largest shareholders have any sense of ownership in the companies in which they invest. No employee receiving a small amount of stock in a major corporation is going to change the way they perform their work by owning a pittance of shares as an employee benefit.

Now we have a small partnership with two partners, with the shares split 40-60. Both partners agree that the company is not growing as fast as they would like, and both agree that having another partner would be advantageous. The partner with 60% decides to issue new shares (after all he or she controls the board and has this luxury). Before there were 100 shares; now there will be 150 shares. The additional 50 shares will be used to attract a new partner. If before each share was worth $U.S. 100, now you could look at it and say each share is worth much less. But is that really the case?

You need to look at shares instead as a means of motivation. Individuals need to sense ownership in the business and shares are merely the accounting technique for allotting that sense of ownership. You could feel you've just lost value in your stock. But that's only if you're ready to liquidate the company. Instead you've just invested in a new partner who over time will make your shares worth even more. That new partner needs a sense of ownership. You will certainly feel the sense of helping that new partner to succeed.

So stock shares are not to be viewed as a form of compensation. They are a mechanism (pieces of paper) to instill a sense of ownership, a stake-in-the-game, of individuals. The share price really doesn't matter. It's the desire to hold on to this ownership in the hope of a much brighter future that is the most important. Individuals must really sense the loss when shares must be given up, and a thrill when shares are saved or accumulated.

We look for this mechanism to dramatically change behaviors. We want individuals to really care when they have to give up some of their ownership in exchange for operating funds.

Today if I'm an employee in a research organization in which I no longer sense ownership, I can easily slip into a mode of work where I hide my lack of productivity for up to a decade, and in the meantime I polish my resume and keep my contact list ready for that next job opportunity (i.e., retired in place+). After all I make a good salary, and ten years in a high-paying position is not too bad. I'll do okay on the severance, and maybe I can even double-dip by finding my next position quickly. Who cares if those few warrants I received are worth nothing. I'll hold onto them just in case the next generation of researchers stumbles across something.

Tomorrow we want the sense of ownership to be primary to the motivations of the researcher. His or her future rests largely on the success of the ownership position, and failure is personal. This is not a matter of tracking stock prices on a daily basis and doing the multiplication. It's a matter of really taking ownership personally: of that sense of ownership felt by homeowners. If this is the case, if we find this a valuable attitude to instill in our employees, then there should be better approaches to using shares as a motivational tool...