The Value Of Employee's Feeling Like Owners Of The Organization
Organizational Psychologists have attempted to determine what effect, if any, employee ownership has on motivation, performance, job satisfaction and employee behaviors.? Included in their definition of “ownership” is both financial ownership and psychological ownership.? Although there is a recognition that any relationship will be impacted by the scope of ownership, the type of ownership and the degree of ownership there seems to be a general acceptance of the premise that employees will act more like owners if they are, or feel like owners themselves.? Since the return on investment to owners will generally be correlated with the organization’s performance, employee-owners should be motivated to extend their best efforts and to focus those efforts on organizational performance.??
Since medieval times people in the agricultural sector and craftsmen engaged in the private creation of physical goods have generally owned their output, to consume or to sell.? However, this was true only for those who were not working for another party who owned the capital.? When the Industrial Revolution moved independent workers into organizations and began to pay them for their time or physical output, ownership typically was limited to the owner of the capital. Since most employees became "hired hands" they were less likely to feel invested in the organization.
As property in the form of intellectual capital became significant there arose a new issue… who owns ideas or innovations?? Intellectual capital that could be turned into intellectual property that is protected by the law, such as patents and copyrights, posed difficult questions about what rights the creator owned.? Should organizations take the position that inventors who had been on their payroll when they created a breakthrough product that led to a significant economic benefit had already been paid for their work?? Or were rewards due them?
As publicly traded organizations came to dominate the for-profit sector in the U.S., the nature of ownership in the form of equity raised issues as well.? It was clear that one’s ownership of equity could establish that party’s claim on some portion of the profits and overall value of an organization. This portion was calculated by measuring a party’s equity as a percentage of total equity.? But often all equity was owned by parties having no part in the creation of the profits and overall value.? This called into question whether it was desirable to have employees of the organization participate in ownership by having them acquire equity.??
The initial use of stock in rewards programs was targeted at executives.? This was an attempt to influence executives to act in the best interests of owners, by making them owners who shared in the proceeds produced by success.? Many believed that executives who were rewarded solely through base salary and short-term cash incentives might be motivated to make decisions based principally on the impact of strategies on their own personal wealth.? Stock options, grants, restricted stock, and performance share programs became popular devices for aligning the interests of the executives and the owners.
But considering the use of ownership to motivate the rest of the workforce raised even more difficult questions.? Could employees who did what they were instructed to do really have a direct and significant impact on organizational performance?? Would employees be likely to believe their individual performance had any significant relationship to the overall organizational performance… and even have any impact on stock price?? Did the organization want employees to even concern themselves with stock price?? After all, the price of an organization’s stock is influenced by macroeconomic factors and things clearly outside the direct control of employees.? Given that reality would the possibility of earning company stock really provide a positive motivation or would it be viewed as forcing employees to stake their income level on something they did not control, and as a result create resentment?
In the U.S. tax advantages are available for organizations that use programs resulting in financial ownership for employees.? Favorable treatment is given when Employee Ownership Plans (ESOPs) are adopted as a vehicle for conveying ownership interest to employees.? This vehicle has been used to convert organizations to employee-owned entities.? Indirectly the tax code encourages the use of stock programs for highly paid personnel.? If cash compensation that is not performance-related exceeds $ 1,000,000 annually, the organization can no longer deduct it as an ordinary business expense.? These tax advantages signal a belief that employee ownership programs produce social benefits, at least in the opinion of law makers.?Significant financial ownership by employees can change the nature of governance, since employees owning stock may also gain voting privileges that can influence how the organization is managed and who benefits from its success.?Although some organizations are careful to limit voting rights to only selected owners of equity employee owner opinions can still influence management decisions.
An HR executive at McDonalds, an organization using broad-based stock ownership, once told the author “figure out if the fact that a lot of the stock is in employee hands is the good news or the bad news before you go crazy with distributing stock.”? He believed that motivated and committed employees meant the stock was in friendly hands.? The vast majority of publicly traded organizations in the U.S. are owned by parties who are not employees and very often have only one interest… return on investment.? But when organizations make possible and encourage financial ownership by employees, they in effect share the responsibility for deciding how employees are treated.
What about “psychological ownership”?
Most organizations have come to recognize that employees who are committed to their work and to doing it well to the benefit of the organization are a valuable asset.? Employee engagement, employee satisfaction, employee motivation… these are all psychological states that seem to result in more productive and more committed employees.? Economic ownership through equity is not an option in many organizations (e.g., public sector entities, not-for-profit entities and even privately owned organizations that are unwilling to distribute equity).? But these organizations are likely to want the benefits of a committed and productive workforce so they reasonably should attempt to generate positive psychological states in employees.? When financial ownership is not available, they must look for rewards that facilitate a feeling of psychological ownership.
Providing employees with desirable roles in the form of well-designed jobs is one approach.? The “job characteristics index” is a model that has been shown through research to provide guidance in designing desirable and effective roles.? In this model the five characteristics of a “good job” provide an adequate and appropriate amount of::
The appropriate amount of each of these has been shown to have a positive impact on performance and satisfaction.? Research studies that when work is viewed as meaningful it positively impacts its desirability to those performing it. People with “good jobs” are able to experience psychological states that are desirable:
The positive feelings resulting from “good jobs” are often aggregated under the term “intrinsic motivation.”
It could be argued that jobs that are “good” are a reward in and of themselves (are intrinsically motivating). There is significant research evidence that jobs lacking the appropriate amount of the five characteristics fail to produce the desired psychological states and therefore lead to poorer results.? When jobs are poorly designed and are not satisfying, it mandates that the organization somehow make up the deficit in order to keep employees.??
Henry Ford had to pay very high wages and live with very high turnover to staff his auto assembly lines.? His difficulties can be attributed to putting people into roles that had inadequate doses of these characteristics. ? Whether the higher level of extrinsic rewards can overcome the lack of extrinsic rewards completely depends on the context.? A research experiment at a retailer showed that employee satisfaction was related to customer satisfaction and store performance, principally due to the reality that dissatisfied employees had a negative impact on customers and satisfied employees had a more positive effect on customer loyalty and purchasing behavior.??
Satisfying employees is a universal challenge.? But how?? If someone is paid a very high wage to tolerate a job they hate and find unrewarding, it is reasonable to think that even though they do not quit they will not produce the desired results when dealing with customers.? On the other hand, if the employee’s mental state is secondary, as with a laborer doing what they are told, the organization may still be able to get the work done with lousy jobs, albeit at a high cost.? The bottom line of having satisfying jobs is that it facilitates psychological ownership.
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Should Financial Ownership Be Used… And How?
In addition to the nature of the job and the degree to which it leads to intrinsic motivation organizations must consider whether the package of extrinsic rewards is aimed at producing both satisfaction and performance.? Research tells us that employees must feel their rewards are equitable, competitive and appropriate if they are to be satisfied with them. One of the issues regarding appropriateness is how to offer a mix of base pay, benefits, cash incentives and ownership programs that is most appealing to employees and that produces the best results relative to attracting, retaining and motivating the type of people the organization needs.??
Employee stock purchase plans have been used to encourage employees to become owners.? There usually is a significant reduction in the purchase price in order to provide the motivation to buy stock.? Yet the participation rate typically varies considerably, based on earning level.? Lower paid employees may find it difficult to make purchases, even at a considerable discount, because they have a limited amount of discretionary income.? Yet management often despairs that so many employees do not participate in stock purchase programs, despite the fact that this pattern of participation should be expected.? Another problem can occur when employees feel the need to sell some of their stock. A sale may be taken to be a lack of commitment to the organization.? Although this is generally more of a problem when highly paid executives sell stock, an organization should be careful not to misread a sale made for economic reasons as a lack of loyalty or commitment.? After all, most investment advisors tell clients not to put all of their resources into one investment.? Yet lower paid employees may find the stock purchase plan to be their preferred (or only) savings plan, especially if there is a front-end gain built in due to the discount in the price.? Because this results in the unwise “all eggs in one basket” result. there may be a reluctance of employees to take the associated risk.
Some organizations use employee incentive plans as a vehicle to get stock in the hands of employees without exposing them to some of the potential negatives.? For example, a cash profit sharing plan could be designed to pay out partially in cash and partially in stock.? The current tax on the total award could be taken out of the cash portion, leaving the employee with owned stock and without tax liabilities at the end of the year.? [Note: Caution should be exercised if employees in countries outside the U.S. are participants, since the tax treatment of stock differs significantly, and in a few countries awarding real stock in a foreign entity is not allowed].? It can be argued that this approach provides motivation to focus on both the short- and long-term performance of the organization.
If stock plans are used as a vehicle for making employee owners, it is important for the organization to select an approach that will fit their objectives.? Stock options have been widely used in the U.S. for many decades and although they are used more frequently for senior management some organizations believe in providing options for all employees.? Start-ups and emerging organizations might consider using stock in lieu of higher base salaries and incentives or more generous benefits programs, since they often are not in a position to commit themselves to fixed cost programs.? Many entrepreneurs use a “rise or fall with us” approach to stock programs, promising great rewards if the enterprise is successful but having employees work without a net if things do not go well.?
Stock options often breed a day-to-day focus on the stock price, even though volatility may be due to factors outside the control of employees.? The wild swings in stock prices during the pandemic can cause panic in those with short-term views.?The necessity for finding the resources to exercise options, as well as making good decisions about timing both exercise and sale relative to tax liability may be challenging for some.? Most employees are not knowledgeable about these issues and may make bad decisions.
Restricted stock is a vehicle for promoting a longer-term perspective.? Employees may be awarded grants with a fixed or variable vesting period.? If the stock price increases over the restriction period the employees participate in that gain, assuming they meet the restriction requirements.? Since the employees own the stock once restrictions lapse, they do not have to finance an exercise, but they must be concerned about tax rates and timing.? Additionally, the organization will have to charge earnings for the paper value of grants as they accrue, during the restriction period.? As a result, many organizations control the number of employees who are given restricted stock grants, to control the accounting liability.? It is also important to be sure the organization will want the employee to stay the entire restriction period, since a valuable grant may exert significant retention power and be viewed as a financial commitment by employees and their lawyers.? Yet a well-designed restricted stock program can provide both short- and long-term motivation, particularly if the vesting period is variable, based on year-to-year performance.
There have been numerous stories of entrepreneurial/start up organizations that made large numbers of millionaires by putting equity or a call on equity in the hands of employees prior to going public.? Initial public offerings (IPO) are the triggers for converting holdings into cash by employees if they so choose. The basic question for these organizations is who to include in the ownership circle and the magnitude of their holdings.? One question that should be asked is whether the equity is being granted as a reward, for contributing to the success of the organization in the past, or as a motivator, for making the future of the organization bright.? If it is a reward, it suggests that a grant of stock, phantom stock or some other call on the value of the organization that is determined once the IPO is complete would be appropriate.? After all, it has already been “earned.”? If the purpose is to retain key people and motivate them to increase the value of the organization other approaches that encourage retention might be more effective.??
Conclusion
The question for the rewards strategist is whether or not financial employee ownership should be used as a tool to promote attraction and/or retention and/or motivation.? The costs of doing so should be weighed against the expected benefits.? But it is likely that all organizations aspire to creating psychological ownership in the minds of employees, whether or not they provide the prospect of financial ownership.? The unpaid volunteer population that makes much of the charitable activity in the U.S. is “in it for the satisfaction” and that is the kind of reward organizations can provide if they do what it takes to produce psychological ownership in their mission.? For-profit organizations, whether privately held or publicly traded, also have a stake in promoting psychological ownership among their entire workforce.
In deciding the role of employee ownership, the rewards strategist should ask critical questions:
The decision regarding how the optimal amount of both types of ownership can be made a reality will be likely to have a significant impact on organizational success.
About the Author:?
Robert Greene, PhD, is CEO at Reward $ystems, Inc., a Consulting Principal at Pontifex and a faculty member for DePaul University in their MSHR and MBA programs. Greene?speaks and teaches globally? on human resource management. His consulting practice is focused on helping organizations succeed through people. Greene has written 4 books and hundreds of articles about human resource management throughout his career.