Successful Entrepreneurs Need Employee Ownership

    May 3, 2006

“Every individual…intends only his own gain….By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it.”

Adam SmithWealth of Nations – 1776

Over 330 years after Adam Smith made that statement we are still debating the issue of Employee Share Ownership. The high demand and high cost of skilled employees in the developed countries where unemployment is below 5% has reached a point where employees need more than a decent job to keep them from leaving.

You just can’t keep staff in this environment…

I recently was in a discussion where a notable CEO of an Irish based pharmaceutical company said”Every time we get our hands on a good scientist, Wyeth or Abbot Labs offer them a better proposition…. You just can’t hold on to employees in this environment”

Another Irish diagnostic company in a recent Business & Finance article reported that with an average of 325 Employees, they are losing 9 Employees per month at an estimated cost of 3m per year. Source – Brendan Farrell President – Business and Finance – Dec 2005

It’s not about what you pay…

It’s about what it costs you if they leave…

The biggest misconception that an employer has and mistake that they make is to believe that employees work for anybody but themselves…

The idea that the greatest assets that a company has, walk out the door at the end of a business shift is wrong…seriously wrong…..

Employees are NOT company assets

They are scarce experts renting their time to employers. An asset implies ownership.

Doing your best in a competitive global market is just not good enough! It suggests a linear measurement. Steady as she goes means managing to mediocrity.

A focus on cost-cutting and efficiency has helped many organizations weather the downturn, but this approach will ultimately render them obsolete. Only the constant pursuit of innovation can ensure long-term success

Daniel Muzyka, Dean, Sauder School of Business, University British Columbia

Financial Times – September 2004

The best companies outsource to win, not to shrink.

They outsource to:

  • Innovate faster
  • Produce more cheaply
  • Grow larger
  • Gain market share and
  • Hire more and different specialists
  • Not save money by firing people.

    So why give your business away?

    When employees are losing their jobs to out-sourcing, why would employers want to give up part of their ownership to employees? Hiring more and different specialists seems contrary to todays perspective of what the global economy has been doing to jobs in evolved market economies like the US and UK. Even Ireland who benefited so much from US off-shoring in the last 20 years is seeing the Race to the bottom on employment costs. Jobs are being lost to India, China or Eastern Europe.

    You just can’t compete with China on Production or Wal-Mart on prices.

    The answer is in what the Global Economy can deliver ……not what it is taking away.

    “The world has arrived at a rare strategic inflection point where nearly half its population — living in China, India and Russia — have been integrated into the global market economy, many of them highly educated workers, who can do just about any job in the world. We’re talking about three billion people

    Craig Barrett Intel January 2004

    “Over the last decade the biggest employment gains came in occupations that rely on people skills and emotional intelligence and among jobs that require imagination and creativity….Trying to preserve existing jobs will prove futile — trade and technology will transform the economy whether we like it or not.

    “Where the Jobs Are” New York Times 13th May 2004

    In his book, “The Rise of the Creative Class” Richard Florida refers to what he calls the Creativity Index made up of the 3 T’s ; Technology, Talent and Tolerance.

    Technology has created more wealth in the last 25 years than at any point in commercial history. Technology or High Tech as we refer to it is innovation, the implementation of invention of Patents, Brands and Trademarks.

    In order to achieve this, as the article in the New York Times implies, requires immense Talent in University Graduates plus a significant amount of creativity or as I use the term “Maverick” status. No significant advance of mankind has happened without the involvement of someone who was working contrary to what society deemed normal. Sanity may be measured by the level of success; A genius if you succeed, insane if you fail.

    My preference; To be insanely successful rather than to fail with my sanity preserved….

    Therefore Tolerance is the only way to encourage Creativity. It requires the hiring of “a melting pot of Immigrants, Artists, Gay, Religious and non-conformists” because no normal person dares to be different.

    Once you have your melting pot of creativity, you need to empower them to deliver. Provide them with a way to participate – to belong – and therefore to stay and deliver the successful creation of wealth.

    Some interesting statistics on Employee Share Options in the US

  • 8% of Employees got paid Options in 2003
  • 8% of US employees work for Start-Ups in 2005
  • 275 Venture Capital backed Internet Telecoms Communications Companies

  • 77% Employee Share Option Program for all employees
  • 23% Employee Share Option Program to selected employees
  • Venture Capital preferred stock or convertible loans which are by all accounts Options Compensation
  • Source – US The National Center for Employee Ownership – 2004

    US Dept of Labor – 2006

    The future of Share Options and Share Compensation:

    If options aren’t a form of compensation, what are they? ….

    If compensation isn’t an expense, what is it?

    If expenses shouldn’t go into the calculation of earnings, where in the world should they go?

    Warren Buffett – 1992 in Chairmans letter to Berkshire Hathaway shareholders

    The ongoing debate over the last 11 years about share options being treated as compensation has reached a zenith where companies are now accounting for share options as an expense.

    This means that there is recognition of the dilution of outstanding or overhanging share options when valuing a company. This has caused many companies to alter how they pay their executives or employees. Notably Amazon has dropped their share option program of 46 million share options issued in 2002 to 226,000 in 2004.

    The alternative approach is to compensate with shares, or restricted shares. This reduces the potential volatility of shares traded on Stock Exchanges and gives a clear valuation method. With Share Options there was always a question of whether the shares would be exercised in high risk, or early stage companies.

    Share Options are still viable for small, early stage and emerging companies, as the risks remain high, so also the upside potential remains high and such risks require adequate compensation to attract those Mavericks who seek to change the world.

    So Employee Financial Involvement will continue, not only to survive, but to grow as the need to innovate rises.

    The creation of wealth requires a melting pot of creative individuals who think “way……outside the box” whilst normal sane individuals prefer a safe, pensionable job for life…

    And in an ever changing “Instant Gratification” globalization society….. Who is insane?

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    Gerard Brandon is editor of Guru Manager Entrepreneur Toolkit. Founder and CEO 1996 – 2004 of Alltracel Pharmaceuticals Plc. IPO in 2001. Ernst & Young Entrepreneur of the Year finalist 2005. From concept to consumer Gerard built a team that delivered 44 patents, 3 global brands with products on sale in more than 300,000 outlets to reach profitability on sales of $23m in 2005.