Gill South: If you want your employees to care, give them a share

Gill South

How do you get your staff to care about your company as much as you do?

One solution may be to invite your best employees to take a share in the business. After all, as one start-up owner describes it: "It's the difference between owning and renting a house."

His thinking is understandable - he wants them to feel as much passion about his company as he does, and believes employees are more likely to go the extra mile if they have some "skin in the game".

"Incentivising the team is something that I think is a good lever to get the team going forward," agrees Andy Hamilton, CEO of Auckland-based business growth centre The Icehouse.

"How you incentivise needs to be created for the type of business and the stage it's in. In some cases it is not appropriate, nor is the team member interested in this sort of thing, so it depends as much on them and the ability they have to influence the outcome."

For a potentially high-growth start-up, getting employees to buy into the company is an effective way to finance the business in the early stages by paying lower wages, while ensuring they share some of the upside, Hamilton adds.

For SMEs, however, he thinks there are better mechanisms than shares.

"I have seen some owners doing something called 'phantom shares' which effectively is a share of dividends/profits which is quite good."

Hamilton warns that it is important there is clarity on the terms, and that employees realise how long it is likely to take for the specific goals to be achieved. It could be 10 years.

"The old days of getting a few options and becoming a millionaire a la Google are not here - you have a better chance at the races, or buying a Lotto ticket."

Tony McNaught, a corporate finance partner at KPMG, has helped several companies in the past couple of years with employee share schemes. As he puts it: "What you are trying to do is reward, motivate and retain people. If you give them shares, you are highly likely to retain them."

He warns that one of the issues with share schemes is that people's behaviour can change when they become a shareholder - in some cases for the worse. "They can behave like they are the owner," McNaught says.

'All of a sudden they are interested in getting the accounts every year - and they own 0.01 per cent of the company."

One option is to establish a separate employee shareholders' scheme and appoint a trustee who holds the shares on their behalf.

The shareholding should be limited to key employees who are in critical positions, he suggests. You can build in scenarios where if they leave before three years, the company can buy the shares at the same price as day one. "You are basically penalising them for leaving."

This could be useful not only for struggling start-ups but for companies at the other end of their lives, says McNaught. For example, a company owner might be grooming middle management to take over. "The last thing they want is for these key people to start looking for other opportunities."

Icehouse co-founder and angel investor David Irving advises young companies to err on the side of caution. Control of the company needs to be protected, he warns, and in a start-up situation, it's easy to trust the wrong people.

Irving advises getting to know people well first before placing your confidence in them.

In the case of small start-ups, he advocates a more straightforward incentive programme giving staff the opportunity to earn some of the riches of their own endeavours. But giving away "unnecessary ownership" when they are not contributing to the performance is not a good idea, he says.

"You need to use your head as well as give them a share your heart. Unless people think about the implications for the longer term, then they are going to risk making a commitment today that will burden them tomorrow, all because of the goodness of their heart."

Before it was bought and broken up, Navman had a number of Employee Share Purchase Plans (ESPP) which worked very well, says Steven Newman, former Navman director.

Now chief executive of Eroad, a high-growth technology company which is simplifying the road user charge scheme in New Zealand, Newman has introduced the same idea with key staff.

In Navman's heyday, about 60 of the company's 1000 employees were on ESPPs.

"At Eroad, we've about 14 per cent of equity tied up in Employee Performance Share Schemes at the moment," he says.

Eroad staff involved in the scheme are offered an interest-free loan, and the shares go into a trust which is managed by two trustees.

The technology company was helped by KPMG. "You want a tax accountant - the last thing you want is to develop a tax headache for the employee,"says Newman.

Share schemes can create an "X factor", which can help motivate staff, he says. For the first people that come into the business, it's more than just a job, says the experienced entrepreneur.

"It's more like a religion. They are putting in more effort than you would realistically expect from an employee."

A stable workforce is key to any successful knowledge business, he says.

"It's so critical for later growth that you are keeping people retained in critical positions."

Another plus of employee share schemes is they can be used to attract the right people.

"There might be a gap in what the company can offer - an employee share scheme can help make up the gap," says Newman.

The employer reaps the benefits too.

"It takes it to a more holistic level. You are a part owner, even though you may not be a big owner."

Having a stake in the business may also prompt staff to act if they see anything they believe may be harming the company. And it may also prompt them to add value in an area which would normally be their main area of focus.

"Something may not fit into your normal time in the day, but you do it later."

That's the X-factor.