Don’t Kill Your Valued Team’s Enthusiasm

So, you’re a business owner and you’ve set up an employee share scheme such as an Employee Management Incentive Plan (EMI), with pay-outs conditional on a sale of the company. You might ask yourself – what should I be saying about my plans to sell?

The guiding principle is simple but hard to apply: you need to consider each employee’s rational self-interest.

There are likely to be three distinct groups of employees: those for who a sale would be unqualified good news, those for who it might be good news, and those for who a sale only brings risk.

Let’s look at each group in turn.

The ‘unqualified good news’ group

These are employees who hold sufficient shares or options that they are likely receive a life-changing amount of money on a sale. The amount of money will be large enough to make them indifferent as to whether their job survives the change in ownership (either because of redundancies or an unbearable change in culture).

This is not just about the amount of money, but the probability of getting it. So, their shares are likely to be free from stretching performance conditions, financial targets or harsh forfeiture provisions for leaving.

This group will normally be made up of founders, and senior key employees. Don’t worry about oversharing with this group – the more you can tell them about the sale plans, the stronger the incentive to help you!

The ‘might be good news’ group

These are employees whose holding of shares or options under an employee share scheme is modest or have challenging conditions attached. This means that the financial reward from a sale may not outweigh the risk of losing their job on a change of ownership.

You need to communicate more sensitively with this group. Give them confidence that they will benefit from a sale by:

• Communicating about your plans and financial projections regularly (annually at a minimum)
• Being specific about how much they will get in different scenarios
• Providing projections that help an employee assess how likely it is that any performance conditions will be satisfied
• Be clear if you intend to sell the company to the highest bidder, or to a buyer that will be sympathetic to the existing culture and workforce.

The ‘only risks’ group

These are employees who have not participated in an employee share scheme. There is no benefit of a sale, just the risk of losing their job.

You may feel a moral obligation to be transparent to this group of employees, but the message is a risky one to deliver!

Turn the problem on its head

Clearly the first group are fine. The second group are manageable. You have a conflict with the third group.

Rather than asking the question of “how should I communicate with each group”, perhaps ask the question “can I move more employees into a more positive group?”. The answer is yes:

• Maximise the breadth of employee ownership. Giving even small percentages to employees can make a big difference to those who would otherwise be in the third group.
• Hold back on the conditions! Most people are risk averse, and adding challenging performance targets can be demotivating, shifting someone potentially from the first ‘unqualified good news’ group into the second ‘might be good news’ group.
• Commit to employee ownership. This minimises the downside risks of a sale: if a company is transferred to employee ownership where it is being run in the financial best interests of all employees, all employees shift into the first group.

Employee ownership can provide owners with an exit that is just as, or even more, financially rewarding than the alternatives. Everyone wins, everyone is motivated. Check out our fact sheet on the Employee Ownership Trust (EOT) register for our webinar “An Introduction to Employee Ownership Trusts“, or contact us for more information on 0208 949 5522 / enquiries@rm2.co.uk