Offering part ownership or stock for exceptional work has become a common benefit at larger corporations. Stock compensation has become so widespread that public companies had to be required to report it as an expense starting in 2006.
As it becomes easier — or at least more common — for members of the workforce to be self-employed or start their own businesses, you as a corporate manager have to come up with creative ways to keep your employees on payroll and be engaged. Many people agree that giving employees an ownership stake, especially at a startup, is a surefire way to motivate them to bring their very best to the company.
Here are some reasons why this is the case, and why this benefit is becoming even more popular these days.
It aligns employee objectives with long-term goals.
Over time, workers can develop tunnel vision. They think only about their own projects, about making their deadlines. Rather than working for their company, they’re working toward their own career advancement. Owning equity in a company encourages employees to work with a view toward the long term.
When you give employees stock, they know that what’s best for the company is also best for them. It might incentivize them to go above and beyond to help other employees. Company leaders of all kinds have stated that stock options also encourage employees to think outside the box and come up with money-making ideas on their own. This raises hope that someday all of their extra effort might be “worth it.” No longer are they working for a disembodied entity, but something with a much deeper personal connection.
It incentivizes productivity.
As a manager, you simply can’t be watching all your employees all the time. When there’s no one watching to hold them accountable, it can be tempting for employees to slack off and spend time on unproductive activities.
When employees have stock, this tends to change. They suddenly have an incentive to hold themselves accountable. They know that every moment of lackluster productivity could cost them money in the long term. Employees will work harder because they’re not just working for you, they’re working for themselves now.
“There are two main reasons why productivity rises,” says James Tamplin, founder of Firebase, a startup purchased by Google in late 2014. “Number one: People want to feel ownership in their work, stock options let them do that. Number two: Smart people know that if they join a company that is growing quickly, their stock options will be worth more than many years of salary. The trick is picking the right company.”
It improves morale.
Stock compensation can also be a great way to make your employees happy. It’s even better than a cash bonus because it’s something only your company can give them. Any employer can pay cash, but only you can give them the long-term benefit of ownership in your company.
Employees do need to have confidence in the company’s long-term outlook for this to work. If they have doubts about the future of the company, then stock compensation might just feel like worthless pieces of paper. Don’t give your employees stock to gloss over your company’s struggles, do it to reward them for helping make the company a success.
It fosters unity.
Too often, divisions can crop up within companies between management and labor. Employees might come to resent upper management. Lack of decision-making ability and unequal compensation causes divisions within companies large and small.
“In my experience, I’ve seen that stock helps with unity, though in a startup’s case, the fact that you’re a small underdog against the world has a little more of a unifying factor than options, though they certainly help,” says Tamplin.
Giving employees equity in the company can make them feel as if there’s less of a divide. As part owners, they will tend to feel better compensated, better regarded and more involved in the long-term strategic direction of the company.
It saves cash.
Saving money should never be the primary goal of giving employees stock. As mentioned above, using stock compensation to paper over a lack of profits and strategic vision is probably likely to backfire.
That being said, the cash savings from giving employees stock rather than cash bonuses can enhance the stability and flexibility of a company. It improves your ability to invest in new equipment, spend more on things like marketing and research and development, or to hire more people.
There can be downsides to paying employees with stock, and you don’t want to go overboard and dilute existing equity. Used judiciously though, part ownership can be a great tool to get the best out of your employees and resources.