When employees choose to buy their own company's stock, proponents say employees stop acting like workers and begin acting like owners.
They stick with the company longer, find creative ways to help make it more successful and, yes, stop throwing out old paper clips, all in the spirit of boosting their own bottom line.
But when an organization takes a nosedive - hello Enron, Nortel and Bear Stearns (which is one-third owned by employees, incidentally) - guess who's most at risk?
WHY GIVE STOCK?
Companies develop stock ownership plans for their employees for a few reasons. In the past, they were mainly used to reward the golden boys and girls of the office. Then organizations - particularly those in technology - began to offer all employees the opportunity to buy in, as long as they planned to stay for some length of time. In fact, many stock plans dictate that employees must remain employed with the company for at least two or three years before they can invest.
This can have repercussions a company doesn't anticipate, however, says Thomas Timmins, partner at Dale & Lessmann LLP in Toronto, who specializes in venture capital.
"It's a good way to compensate people and tie them to the company, but that doesn't always work out for employers. I've seen situations where people are sticking it out with a company just for that reason, but that's not the best result for anyone," he says.
Employee retention is strong at PCL Constructors Inc., says Ross Grieve, president and chief executive officer of the Edmonton-based company, which has been 100 per cent employee-owned since 1977. More importantly, because 2,500 employees, or 80 per cent of all who work there, own shares, the corporate culture is different than at a traditional company.
"Our employees get a little piece of the rock, as it were," he says. "By being an employee-owner, it certainly elevates their commitment to the organization."
Perhaps not so incidentally, PCL has shown a profit every year since 1977.
THE RIGHT WAY
PCL has the recipe right, says Martin Staubus, director of consulting for Beyster Institute at the Rady School of Management, University of California in San Diego. Companies that simply offer employees company stock after a couple of years aren't doing themselves any favours.
The trick is to allow employees to feel their ownership matters. That means treating them like shareholders who deserve to know the inner workings of the business.
"When companies do employee-ownership right, employees are much more thoroughly informed than at traditional companies. It's not like employees have to go in and demand information," Mr. Staubus says.
Organizations should also set up their company stock plans so that exiting employees must sell them back to the company, says Mr. Timmins. Shareholders have rights, including the right to see financial statements and show up at annual shareholder meetings - even ex-workers who have gone to the competition.
And don't give away company stock as a way to save cash flow, if you want to change your corporate culture, warns Barry Barnes, executive vice-president of ESOP Builders Inc. in Toronto. "You don't value what you don't pay for," he says.
WHAT'S THE POINT?
If your company's employee stock ownership plan, or ESOP, makes you sell it back to them when you leave and you can't sell shares on the TSX, why bother having them in the first place?
"That's a good question," Mr. Timmins says. "If you're an employee in a privately held company, there's often nothing you can do with your shares. So why are you buying them?"
Here's what to look out for: dividends. Although private companies are not required to offer this payout, usually in the 3- to 5-per-cent ballpark, some, like PCL, do. In fact, when PCL's shares are revalued once a year, employees who own stock can choose to get their dividend cheque or pour the money back into the company.
NOT AS IMPORTANT ANY MORE
Is a return of 3 to 5 per cent enough to sway employees to join a company though? Probably not, says Joanne Whittle, director of human resources in the sales leadership practice at Peak Sales Recruiting Inc. in Ottawa. According to Ms. Whittle, the tide has turned when it comes to the average employee in today's technology sector. Few have dreams of making it as big as the fabled Microsoft receptionist from the 1980s who is now a multimillionaire simply because she owned a few Microsoft shares.
"The majority of employees aren't willing to sacrifice part of their salary for something that may or may not come to pass. It's never about options any more. It's always about higher salary," Ms. Whittle says.
She advises that job seekers - except those in high-end executive or CEO positions - never accept company stock in lieu of salary.
THE ONE-TWO PUNCH
Of course, employees are happy when the company is doing well and they're pulling in some extra cash. But what happens when it tanks? That's why it's so important to diversify and keep most of your money in other investments.
"It looks like a steal of a deal to take all of your investments and buy shares in your company, but if your company goes down, not only do you lose your job, you lose your savings too," Mr. Timmins says.
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Buying in
A study conducted by the Toronto Stock Exchange comparing ESOP versus non-ESOP public companies found:
Five-year profit growth was 123 per cent higher at companies with employee share ownership plans.
Net profit margin was 95 per cent higher.
Productivity measured by revenue per employee was 24 per cent higher.
Return on average total equity was 92.3 per cent higher.
Return on capital was 65.5 per cent higher.
Source: ESOP Association
Canada
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THE UPSIDE
People stop throwing out paper clips and there can be a real culture change. Even if employees only own 1 per cent of the company their actions collectively feed directly into the company. That's where the magic starts to happen.
Thomas Timmins, partner at Dale & Lessmann LLP in Toronto
THE DOWNSIDE
Sometimes the company does really well and you think, 'I'm so glad they didn't give me cash. They gave me this investment that did really well.' Other times a company pulls an Enron and it's a disaster.
Martin Staubus, director of consulting for Beyster Institute at the Rady School of Management, University of California in San Diego
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