Like many entrepreneurs, Bruce Powell struggled with whether to offer employees equity in his company. Prior to co-founding Toronto-based recruitment firm IQ Partners Inc. (No. 166 on this year’s PROFIT 200) in 2001, he had worked for companies at which staff ownership was offered, but never fully delivered. He’d listened as fellow business owners urged him to cling tight to his equity. He’d heard horror stories of intra-company spats that erupted when employee owners disagreed with their bosses.
But the way Powell saw it, employee share ownership plans (ESOPs) failed only when they were poorly planned and managed. So, he built what he believed would be a dysfunction-free program, open to all revenue-driving employees who meet specific performance benchmarks and giving them equal say in company matters. Powell implemented his ESOP on IQ Partners’ first day in business 10 years ago. Since then, it has been a “key driver” of the firm’s growth—which topped 255% over the past five years.
Some 40% of Canada’s Fastest-Growing Companies offer some form of employee ownership, spurring higher levels of creativity, employee engagement and organizational alignment—which can lead to higher productivity, profitability and company valuations. But Powell and other PROFIT 200 leaders know that an effective ESOP is built on savvy planning, consistent communication and, yes, money—up to $50,000, depending on the complexity of the program. Before giving employees skin in the game, you need to know the rules.
Determine if it’s Right for You
Most entrepreneurs aren’t ready to cede even the small degree of ownership and control that an ESOP entails. But Bruno Cloutier had no qualms about sharing equity when he launched an ESOP at his IT implementation firm. “I’m happy to sell a lot of shares,” says the president of Quebec City-based Momentum Technologies inc. (No. 139).
“The way I see it, the shares I have left will have more value, because there will be new energy put into the company.”
Employees must also be interested in an ESOP for one to work. Cloutier knew the time was right when employees started asking about ownership. Not all workers are so proactive, so some PROFIT 200 companies conduct surveys and all-staff meetings on the subject of employee ownership not only to gauge interest in ownership, but to estimate its motivational power. Demographics matter, too: ESOPs tend to be longterm propositions and, as such, are often ineffective retention tools for Gen Y staffers, who gravitate toward more immediate benefits.
Choose a Model
You can offer up a large chunk of the company through an ESOP, or retain the vast majority of shares for you and your existing shareholders. You can grant equity in addition to or in lieu of other benefits, ask employees to buy into the program, or top up their contributions as an added perk. You can issue options to buy shares later at a predetermined price. You can even offer different equity classes, say, shares with no voting rights.
Jeff Smith liked the idea of offering employees equity, but he didn’t like the idea of sharing decision-making abilities as his company matured. So, when the president of Ottawa-based Allphase Clinical Research Services Inc. (No. 173) implemented an ESOP in 2008, he attached a few strings. Every year, employees are given share options based on their tenure, salary and role. The catch is, they can’t exercise their options till 2018. At that time, their options are convertible into an equivalent number of shares at $1 each— or cash. Employees won’t get the right to vote on company business until they convert their options to shares, which means Smith won’t have to deal with unwanted advice about the course of the business until then.