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August 14, 2005
Stock options an incentive?
I'd like to hear from anyone who has ever had a good experience (as an employee) with stock options or other employee incentives. I am in the process of moving Mobile Research into the next phase of a startup , where I need to start attracting greate people at a pretty good pace. To do this I need to be able to offer competitive pay and benefits (as well as interesting work and a good environment and culture). So naturally the topic of stock options has come up. Mobile Research is going to start offering benefits to it's employees next month; health insurance, parking, vacation, etc. , and I am considering what kind of incentives I want to be able to offer to be able to attract more people of the calliber of the current employees.
I've had some experience with stock options as both an employee and and employer. From an employer perspective, they are a pain to administrate, and frankly after the dust settled from the collapse of the Internet bubble, I am not sure that stock options are so much of an incentive. From an employee point of view I know they didn't incentivize me at all. At the last company I worked for, the criteria for options wasn't very clear. I also had a very large chunk of options from the sale of my company to that company. If I had excercised those options when I had the chance , I'd be $58,583 in the hole right now. So at some point that becomes a dis-incentive for the employees. I think if you work at a company like Google, that is public and you can compare your strike price to market price, it might work. Although I know you quickly get into a situation where there is a very large amount of time wasted by employees watching the stock price every day and focusing on that, instead of focusing on growing a successful company. Since Mobile Research is not going to be going public any time soon , I don't think stock options, with some arbitrarily assigned strike-price would be much of an incentive to the employees.
I believe very strongly that my employees need to have some stake in the success of the company and need to be able to directly see how their work affects the company. To that end we are going to implement profit-sharing, starting next month. Every quarter, a percentage of the company's profits will be divided among all the employees. This isn't money that the company is giving the employees or something that they are entitled to; instead the employees get a percentage of how well the company performs.
I've had a lot of great input from my brother who runs a 200+ employee company and has a similar program in place. I'd love to hear input from anyone who has had good/bad experiences with profit sharing, especially in technology companies.
Posted by David Adams at August 14, 2005 11:47 AM
Comments
David,
What's the equity structure of the company? If you do go public or get acquired, who gets the money? The downside to not offering options is that if the company does go public/get bought employees won't share in the proceeds unless you set up some alternative method of sharing the now liquid equity.
If equity is closely held among founders, a sale/IPO can be very dispiriting in two ways - "why have I worked so hard to make the founders filthy rich" and, in the case of an IPO, "why continue to work hard to increase revenues and make someone else richer when I don't share in that?" Put simply, why will someone care about beating revenue goals when very little (or none) of that flows into their pocket?
One answer is what you're about to do - profit sharing. The advantage of this is that even if you're private, employees share in the financial success of the company - they get cash now - which can lessens the "God, I wish we'd IPO so I could sell some stock" pressure.
I'd encourage you to do real profit sharing, i.e. set aside some of the profits for running the business and then distribute the rest - ALL of the rest - as profit sharing. Whatever you do, beware of the "% of your salary" trap, i.e. giving people some percentage of their salary if the company hits goals. That's not really profitsharing, it's a kind of paternal pat on the head - if your company takes off, the available profits may well outstrip the bonus amounts in which case... who gets the extra money?
Finally, don't rely just on financial things as benefits - think about things like matching charity donations, on premises amenities (espresso machine, pool table, whatever), child care... the specifics will vary by team, but if the place is fun to work at and people feel like you care about them they'll come work for you.
Posted by: rick gregory at August 14, 2005 01:32 PM
A couple of points that have always guided me:
1. It's their incentive/program . . not yours. If they aren't excited by it it is the wrong program.
2. Profit sharing IS a stock option plan . . .it just pays every period/quarter in cash vs. gambling that it will be worth something in the future. The dangling carrot is taken away, and you can have frank, in-the moment conversations about employee value, impact and results. There is also something extremely real (if Pavlovian)) about rewarding NOW for current results - "reward the activities you want to see repeated". The upside for the employee is that they have cash in pocket right now and don't have to worry about what "might be". The uupside for the employer is that if an employee quite - say the day after they vest - there is no outstanding shareholder.
I say give the ownership/equity to the people who show up to work today and don't get tangled in the legal and future issues of stock.
A final incentive for attracting talent: with profit sharing you can say: we anticipate your impact to hit within 30 days, so you get profit sharing after one month . . .and you let go of the entire 'vesting' conversation.
I like your point about checking the stock price each day . . .with profit sharing, you WANT your team to be checking your performance measures EACH DAY, and reacting.
Great questions.
PS - sometimes it's simpler that all the lawyers want to make it seem: if you get bought tomorrow for $100M why not give the same "profit sharing" percentages to your team? It's profit, right? Conversation finished. Now you can get back to the work of building value rather than going through endless "what if's" with the employees.
Posted by: Christopher Adams at August 15, 2005 06:47 AM
A follow up after reading Rick's points above and we have found this to be true in our profit sharing: don't PS on salary %. If you need to have two or three tiers - line level, executives, etc a bigger chink is acceptable (people understand that) - but people DO NOT understand why someone makes $50K and another makes $55. Profit "sharing" means take a percentage of the profit and distribute it TO THE TEAM. Keep the conversation at the "how we performed as a team" level - not the individual level or it will always be seen as a 'bonus'.
Posted by: Christopher Adams at August 15, 2005 06:53 AM