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October 15, 2001 Issue

How Can I Create Employee Ownership Without Using Stock Options? - Part II

In the last issue of Astronology, we explored the concepts of Employee Stock Ownership Plans (ESOPs) and Goal Sharing Plans. In this issue, the discussion continues with a focus on how to design an Employee Ownership Goal Share Plan (EOGS).

The key to creating an Employee Ownership Goal Share (EOGS) program is to first define the program objectives. The objectives provide a clear explanation of the reason the program exists and what it is expected to accomplish.

In the case of an ESOP, the primary objective is to provide an employee benefit directly related to the organization's value as expressed in stock value. Traditional goal sharing programs usually have an objective of improving the performance of a specific unit of the organization.

The EOGS' objective should combine objectives from both programs. Like an ESOP, the eligible employees should see an increased benefit based on overall organization financial success. Goals should also focus on the improvement of both unit-based and organization-wide operational outcomes. The key difference from traditional goal sharing programs is that the cash reward should be treated like stock.

For example, one organization has developed a program where they issue "Performance Award" certificates on an annual basis. Exceeding annual margin targets funds the program.

The allocation of awards is based on meeting or exceeding specific unit-based targets. Three levels of achievement are defined, including

the minimal acceptable achievement required,
the target or expected level of achievement, and
the optimum level of achievement.

The "award" value is a percentage of the incumbents' base pay. Minimal achievement equates to a 10% of base pay award. Target achievement equates to 20% of base pay. Optimum achievement equates to 30% of base pay.

There is a three-year "vesting" schedule. At the time of award grant of the award, the certificate can be cashed in for one-third of its original value. In year two, an additional third of the value can be cashed in. In year three, the final third can be cashed in. Original or revised margin targets must be met in each of the subsequent years in order for that year's deferred payout to occur. In addition, the unit or department-specific targets must be maintained at the minimal achievement level in each of the subsequent years. The employee has the option of using the cash value of the award to fund the organization's Section 125 spending account.

All units and departments must establish objectives utilizing the "balanced scorecard" approach. Unlike an ESOP, the EOGS reinforces the improvement of department or unit outcomes focusing on quality, customer, and financial growth, and human resource improvements. A specific goal related to each is established and given equal value.

Once the primary circuit breaker funding targets have been achieved, like in an ESOP, the distribution is based on the achievement of these balanced scorecard goals, like in a goal sharing program. Unlike other goal sharing programs, the unit and department-based objectives must be maintained at the threshold level for the subsequent two years in order to obtain the deferred payout. Each scorecard goal not achieved will reduce the deferred payment by 20%.

This idea is one that attempts to link employee actions closer to the strategic outcomes of the organization and create a sense of ownership. With this ownership comes the organization's acceptance of employee involvement and empowerment.

The following is taken from a research paper on employee ownership from Ownership Associates, Inc. (www.ownershipassociates.com).

"If employee ownership is to achieve the operation results many hope for, it is essential that the key internal stakeholders, the work force and the management team, eventually come to adopt a set of attitudes, understandings and skills which we collectively refer to as the ownership culture. Ownership adds something quite specific to an organization's culture. Although ownership is a complex concept, one of its central features in many people's minds is an expectation of control. The expectation of participation is, in fact, one of the sources of the power of ownership. At the same time, these expectations are a potential danger. Unrealistic expectations on the part of the work force regarding the extent to which employees can and should participate in decisions present numerous pitfalls. Inflated expectations seem to put employee-ownership organizations on the horns of a dilemma - meet the expectations of employees but risk the speed and quality of decisions made, or disappoint expectations and threaten employee morale today and in the future. Findings from a recently conducted Ownership Culture Survey(TM) reveal that companies that successfully foster a feeling of participation in decisions are more likely to have employees who believe:

that they work hard;
that they are responsible for correcting mistakes;
that meeting customers' needs is important, and
that they have an impact on company performance."

Considering venturing into the world of employee partnership? Be prepared to address the dilemma of building morale but slowing down the decision making process. The EOGS program is an alternative to those organizations without stock but desire to create a culture of employee ownership. This ownership requires true employee involvement and empowerment, however, not just the appearance of such.

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ISSN Number 1549-0467