Employee Incentives that Won’t Jeopardize the Business

There are notable examples of companies that are establishing employee ownership incentives, while also keeping control of the company squarely in the hands of the ownership team.

This past year, popular yogurt brand Chobani made headlines when it granted an ownership stake to its 2,000 full-time employees. The shares are worth up to 10% of the company upon a sale or IPO, and while employees do not have voting rights, they know they have a direct role in whether the company grows. The employees, as a result, can see the correlation between their hard work and the growth of the company.

For CEOs that are facing the age-old challenge of tying employee engagement to the growth of the company, there are a few notes from Chobani’s playbook to consider. Ownership should not be given away lightly, and safeguards should be put in place that prevent employees from gaining too much power over the company’s direction.

However, there is a grey area between cash bonuses and equity ownership that keeps employees focused on the organization’s success. It’s important for CEOs to keep in mind that there are several incentive plans business owners can implement to achieve a unified business environment.

1. Provide classic stock options. Classic stock options are a simple way to offer an ownership-related incentive. Options are tax-friendly for the employee, and they take the fiduciary burden off the business owner, because the duty is only owed after the shares are issued. Owners also can impose vesting limitations—so that, for example, the stocks are only exercisable when the company is sold.

2. Offer phantom stock. Phantom stock isn’t much different from a cash bonus, but it can be tied directly to increases in the company’s value—and that makes it feel a lot like equity to employees. They know if they help raise the value of the business, they share in the appreciation. The good news for employees is they are not taxed until they are cashed out, and the good news for owners is they do not have to pay the cash up front.

3. Maximize the LLC. There are other alternatives that are specific to the legal structure of the company. LLCs formed in Delaware, for example, can take advantage of significant flexibility. Owners can grant actual equity to employees, but structure the terms so there are no voting rights and no fiduciary duty owed to the employee. This again aligns everyone’s interests without owners having to give up control of the company.

Owner-managed and family-owned businesses are often faced with navigating how to effectively motivate their teams to build and maintain value for the enterprise. By developing a package that ties employee incentives with the growth of the company, owners can keep employees engaged while enhancing the enterprise’s prosperity.