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'Ownership Cultures' Create Unity

February 1, 1999
Related Topics: Corporate Culture, Variable Pay, Featured Article
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At last count, more than 14 million people throughout 15,000 U.S. companies now participate in some sort of stock-ownership plan. Research by those who are in favor of this particular business philosophy suggests that offering workers a piece of the rock increases their loyalty, improves their work effort and aligns their interests with those of the company. Moreover, there appears to be a strong correlation between employee "ownership" and corporate profitability.

Because of such results, the percentage of companies using broad-based stock-option plans—plans that allow everyone to participate regardless of their position on the corporate ladder—increased from 13 percent in 1995 to 31 percent in 1998, according to a salary-increase survey from Lincolnshire, Illinois-based Hewitt Associates.

In this era of downsizing and rightsizing, outsourcing and reengineering, proponents of employee stock ownership boast of an environment in which workers and managers alike think and act like owners. A share of stock, after all, represents a legal right to share in a company’s future earnings—if a company does well, the stock is worth more and vice versa. Though employees in an "ownership culture" place a portion of their future earnings at risk, there’s less emphasis on the frangible connection between job and salary, and more on the sort of benefits that can help reward and retain key employees—something all HR managers seek to achieve.

"It gives people something to be excited about," says Susan H. Marcille, partner in Ernst & Young Human Resources Consulting Group of Atlanta, Georgia. "They’re motivated to work harder because they’re sharing in the eventual success of the business."

Employee ownership is increasing.
Companies use a variety of employee-ownership programs. Employee stock-ownership plans (ESOPs) use tax-deductible, company contributions to accumulate stock, which is then granted to individual participants. Employee stock-option plans allow employees to purchase a set amount of shares at a fixed price. And 401(k) plans encourage employees to set aside money for retirement; many companies now match the employee contribution with company stock.

Of the 15,000 or so U.S. companies offering employees broad ownership rights, roughly 9,500 choose ESOPs. Another 2,000 companies allow employees to purchase stock through a 401(k) plan, while 3,000 offer broad stock-option plans.

When the Fort Worth, Texas-based Union Pacific Resources Group (UPR) departed from its parent company, Union Pacific Corp., it needed to encourage its employees to help it succeed. The solution it sought was to create an ownership culture among employees by rewarding 1,600 nonagreement petrotechs, drillers and all administrative staff with restricted shares of stock.

UPR grouped employees by salary and responsibility level, then assigned an appropriate number of shares—50 to hourly and nonexempt employees, 100 to mid-level staff, 150 to senior management. Dividends began immediately, although employees who left the company within a year couldn’t take the stock with them. At the same time, UPR engaged in an ESOP purchase of 3.7 million shares for $107 million.

"We felt that if employees had a share of the company, no matter how small, they would be more focused on the business results and in helping the business succeed," says Karen Wresinski, director of compensation and staffing for Union Pacific Resources Group. In the past two years, she says, each group of employees has received stock options to increase the ownership focus. "The company believes the long-term focus of ownership is a benefit not only to our own employees but to our external shareholders because everyone’s aligned with the company goals."

Because of the recent downturn in the oil and gas industry, however, UPR may not have enjoyed the financial gain from the program that other companies in other industries may have experienced. "I think people are focused overall on the company results," says Wresinski, "but they also recognize that we’re in a difficult time right now."

That’s often the problem with early research that trumpets one business philosophy over another—it doesn’t always take into account an organization’s industry and historical performance.

Another example is Medicalodges, a Coffeyville, Kansas-based chain of 40 nursing homes and assisted living centers. When the owner of the company decided to retire last year, roughly 1,000 employees banded together and, through a $20 million-plus ESOP transaction, acquired 100 percent ownership to "put the future of the company in our own hands," says Harry Denman, the company’s vice president.

Since the transaction, Denman has noticed a new and higher level of employee-owner commitment in caring for the company’s residents, but not necessarily an increase in the company’s top line. "And in our business, if we’re not providing quality care, we’re out of business," Denman says. "We’re hoping the new ownership culture will benefit all of us in future salary adjustments and investment in the company over the long haul."

Learn to engage employees.
Several years ago, the management consulting firm Hewitt Associates caught on to the trend of ownership cultures, and in 1995 trademarked a group of its consultants as The Ownership Network. Network leader Judy Lindquist maintains that there’s enormous interest in building ownership cultures. "It’s one way to get employees more engaged to the business results," she explains.

Hewitt Associates has identified three key elements that constitute an ownership culture: a compensation structure that offers stock, an informational structure that educates employees about the stock-ownership plan and the company’s direction, and an influence structure that convinces employees that each person’s contribution has an impact on how the group performs as a whole.

HR managers should note that it’s not necessary to make tsunami-size changes in a company’s structure to present employees with an ownership culture, but the deal does have to be financially significant. A token amount of ownership won’t encourage employees to think and act like owners. You need to carefully consider and adopt the right kind of ownership strategy. How much ownership should be placed in the hands of your employees? How much will the ownership be worth?

There also remains the belief that simply by issuing stock, a company will more directly connect employees to a business. But granting a financial stake is only one of several factors required to create psychological ownership, says Christopher Mackin, president of Ownership Associates Inc., an ownership-consulting firm based in Cambridge, Massachusetts.

Mackin identifies four additional types of "challenges" that are presented when building an ownership culture:

  • Technical—making sure everybody understands the rules of the road. How does the plan work, how do employees cash out, what does the plan mean in the employees’ total compensation package?

  • Psychological—overcoming resistance to change. Large chunks of employee ownership will generally require not only changes involving employees in decision making, but additional shifts that often echo throughout the entire company structure.

  • Ideological—working with differing perceptions of the meaning of ownership. Although "ownership" is one of the more culturally accessible concepts in the English language, people have varying theories regarding what it actually means. These theories must be reconciled.

  • Structural—determining methods of including employee opinion and participation in managing the company. Companies must devise new structures to accommodate the employee voice, as well as clearly delineate the limits of employee participation.

"Although many employee-ownership companies have the unique potential to build an entrepreneurial culture, few human resources professionals truly understand the difference between legal ownership and psychological ownership," says Mackin. "Legal ownership is represented by documents that reside in a file cabinet. It alone doesn’t necessarily change the way an employee acts. Psychological ownership requires a set of values, beliefs and abilities."

To achieve psychological ownership, HR professionals can make use of the various kinds of training programs that engage employees about the meaning of employee ownership.

At United Airlines a few years ago, William Byrne, then director of culture and corporate education, designed a series of training events called "Mission United" that brought together pilots, mechanics and flight attendants to learn more about the company’s strategy and competitive position.

It was a corporate-led initiative to make sure HR "mirrored an employee-owned culture with regards to compensation, recruiting and development strategies," says Byrne.

"It’s up to HR to teach employees about the business and to train them to be owners. If the training is consistent, they’ll notice this and rise to the challenge. The biggest failure any company can make is to tell people they’re owners and then fail to do anything to support their ownership."

Other strategies that have been adopted at employee-owned companies include conventional small-group training and interactive role playing. A carefully designed employee survey may be the best tool to help HR gauge how well employees understand the concept of an employee-owned company.

Warnings must precede rewards.
Oakland, California-based National Center for Employee Ownership found that over a 10-year period, companies with significant worker ownership grew 40 to 60 percent faster than they would have without worker ownership. "When you combine a significant amount of employee ownership with quality ownership-culture management, you get a company that, according to research, will grow faster than other companies," says Corey Rosen, the center’s executive director.

"The commitment to this direction needs to start at the top of the organization," advises Ed Bixler, president of Benefit Capital Companies of Irvine, California, a specialty investment banking and financial advisory firm. "CEOs and HR managers need to use their positions as bully pulpits to continually reinforce the value of each employee and ultimately the value in their companies."

To make sure employees understand what it means to own a piece of the rock, and how worker performance affects their stock holdings, you should be ready to discuss the nature of ownership beyond the legal definition. Also, cultivating a broad sense of shared values—pooling information with employees about the business, the industry and the competition, and giving people the opportunity to influence the company’s top line—will make people feel good about the company and its products or services.

Still, employee-ownership cultures can work against you if they create unrealistic expectations. Loyalty suffers when HR managers promise employees fattened personal financial portfolios and retirement pots, then fail to deliver. Even the most financially robust company should always inform employees of the manifold risks associated with these programs.

"The last thing you want to do is start making representations as to the extent of benefits a stock-based plan could bring to your employees," warns Kenneth Anker, a partner in the New York office of Smith & Downey, a law firm concentrating in employee benefits law. "That’s when you open yourself up to a claim of breach of fiduciary duties in the case of 401(k) plans and ESOPs, or a possible contract action in the case of stock-option plans and similar equity-oriented programs."

Jeff Gates, president and founder of the Atlanta-based Shared Capitalism Institute, a nonprofit organization advocating the merits of broad-based ownership, says employees who own a piece of the company are more motivated to bring information into the organization.

But, in the United States, most people haven’t been educated to be owners. Therefore, companies can’t simply put a plan in place and then walk away, expecting it to work out on its own. "It helps if you have senior management committed to the ownership culture," says Gates, who authored The Ownership Solution: Toward a Shared Capitalism for the 21st Century (Addison Wesley, 1998). "But often the stumbling block is mid-level managers because they have a problem of letting go of the ‘my way or the highway’ methodology."

If you want to lead a workforce that’s constantly adapting, employees don’t only need motivation to learn and upgrade their skills, but they need an environment where they can own a piece of the company and learn to be owners, adds Gates. "The workforce of the future will be one in which shareholder value is up close and personal, and one in which employees are rightly regarded as among the firm’s most natural owners."

Workforce, February 1999, Vol. 78, No. 2, pp. 60-64.

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