This article was originally published in November, 2001, by the Foundation for Enterprise Development [now the Beyster Institute at the Rady School, UC San Diego] in its online magazine. For a link to this article on their website, please click here.
By Christopher Mackin and Loren Rodgers, Ownership Associates, Inc. Cambridge, MA and Bilbao, Spain
Employee ownership is a revolutionary idea with an identity complex. Two distinct conceptual realms buried within the ownership idea compete for the hearts and minds of those engaged with it.
The first realm is economic. Many are drawn primarily to employee ownership's economic side, seeing in it the ultimate pay-for-performance compensation arrangement. To them employee ownership finally arranges incentives in an optimal manner. Once employees begin to think of themselves as owners, economic advocates believe that rusty "old paradigm" concepts such as the fixed wage and overtime will fade into the background. To this group employee ownership is about designing compensation and ownership plans that get this new message across, a message that consists primarily of economic signals that are targeted not only to senior management but to a much larger, potentially entrepreneurial workforce.
The second realm is moral. People drawn primarily to the moral potential of employee ownership see in it an opportunity to address a long term perceived imbalance of power between employers and employees. By somehow enfranchising employees, this group reasons that employee ownership will eventually replace ancient and oppressive employment doctrines with new models of organizational democracy. Greater organizational democracy will unleash heretofore untapped human potential for problem solving and new possibilities for solidarity among all occupational groups. Voices will be heard that previously lingered in the shadows. Leaders will become more accountable to the lead. Designed well, employee ownership should send a range of social and psychological signals that invite a broader audience to a new kind workplace conversation.
In response to these dual paradigms, enthusiasts might reply - why choose? Rally behind whichever story line motivates you. It has all of this potential and more! The enthusiasts have a point. But leaders in employee owned companies are constantly called upon to define this strange new organizational arrangement from both economic and moral angles. What follows are some helpful hints for beleaguered leaders.
Watch out for the Other Half
The enthusiasts have it at least half right. We shouldn't be forced to choose between our inspirational paradigms. On the other hand, selective attention can also get you into trouble. Employee ownership is not about either an economic or a moral revolution. Regardless of whether its potential is realized or not, it is about both. If you are enthusiastic about one side, chances are it may also be time to attend to the other.
At Ownership Associates, we work with companies to navigate the tension between these two paradigms of ownership. Much of that work has been informed by attitude survey data from 20 companies employing over 12,000 people, who have taken the Ownership Culture Survey (or OCS). Data from the OCS reinforces the dual nature of the employee ownership challenge. One ownership paradigm, which we term "the incentive effect," concerns the economic impact on employee behavior. The second paradigm concerns moral and fairness issues - we call it "the culture effect."
This article discusses the relationship between these two paradigms and how they can each inform the creation of a strong and productive ownership culture. The importance of this relationship is consistent with academic research that describes relationships between both of these realms. For example, one researcher found that "the combination of employee ownership and significant participation makes it possible for employee-ownership companies, on the average, to have an advantage unavailable to their competitors."1
Don't Neglect the Basics
Not surprisingly, entrepreneurial behavior is not an automatic side-effect of adopting an ownership plan. Even companies that have focused exclusively on the incentive effect generally know that they must invest in training and communication if they want people to feel the economic incentive of ownership. Especially with deferred compensation plans, the relevant determinant of employee behavior is not the existence of plans that let employees share in company success; all that matters in the present is employees' belief in such plans. Our research indicates that understanding the plan is a major determinant of such beliefs, underlining the importance of thorough and effective training on the basics of the ownership plan. But questions from the moral realm are inevitably raised even in companies which focus exclusively on the incentive effect. What about voting? Does an ownership interest automatically translate into an owner's voice? Simply using the word "owner" in relation to employees raises questions and expectations - and one of the more common mistakes we've seen is companies who choose to deal with these expectations by ignoring them. Inflated and then dashed expectations are a primary cause of cynicism, and cynicism can undo not only the benefit you were expecting from employee ownership, but even reduce satisfaction to below pre-ownership levels.
Certain approaches appear to be especially effective. These tips will help you promote employee trust in the ownership plan while avoiding some of the problems of cynicism:
- Put your story in context: Talk about other companies that have adopted plans like yours, and the legislative context that makes them possible.
- Make the most of required communication: If you need to send out account statements periodically, make sure that they promote learning, not confusion.
- Don't Flinch: It's easy to avoid bad news or unpleasant truths, but we have found that facing them head-on prevents the destructive rumors and speculation that flow into an information vacuum.
- Frontiers and Boundaries: Ownership should create new frontiers for participation in decision-making. At the same time those frontiers will require boundaries that assure everyone that those with the requisite expertise will always be able to do their job. We'll come back to this topic.
The Role of the Incentive Effect
The foundation of a well-communicated incentive effect lies in creating a degree of comfort with the mechanics of ownership along with a firm belief that all people, regardless of rank, will share in the benefits of company success. This also happens to be the starting point for creating a healthy ownership culture.
Some argue that the incentive effect is all you need, and suggest that you don't need employee-ownership to get it. They point out the success of companies with well-crafted incentive plans. Certainly there are many examples of companies in which "incentivized" employees act like owners, but the only way to get people to think like owners and to feel like owners is to make them owners. And in the long run, we are skeptical that cash incentives elicit real ownership behavior. Intuitively we all know that there's a practical difference between an owner and an investor. Investors generally think strictly in dollar terms, and they tend to have a short- or medium-term time horizon. By contrast, owners are in for the long haul, and they have an emotional attachment to the company that goes beyond dollars.
In addition, the incentive effect can actually be dangerous. It can be too strong in companies with short-term incentive or stock options-the results can be a "casino mentality" in which employees' primary concern is their personal short-term financial well being, and the long-term viability of the company is neglected. Part of the solution is to balance short- and long-term incentives and, by extension, ownership instruments. Companies should be aware of the ratio between the value of short-term incentives per employee per year, and the value of long-term retirement contributions per year. Another more fundamental response is, we believe, to focus on the culture effect.
A New Employment Relationship
Solid communications and training can uncover the natural economic incentives implicit in an employee ownership arrangement, but the greatest power of ownership is unlocked by a more general invitation for employees to participate in a new relationship to the workplace.
This new employment relationship involves more than financial incentives and gives employees a new psychological relationship to the company. In our research, we have found that in nearly every company there is a group of employees who are enthusiastic about ownership, who report working harder, who see themselves more as entrepreneurs, and who are more satisfied. These "believers" feel the culture effect of ownership, and they are the ones who create the competitive advantage for employee-ownership companies. Their prevalence can range widely-the portion of the average workforce classified as believers in our research is 17%, but that portion has fallen as low as 3% at one company and risen as high as 36% at another.
Companies seeking to create a work force of believers need to think about the concrete ways they want to employment relationship to change. We have identified six types of relationships between companies and employees: decision making, information and learning, organizational fairness, accountability, work and pay, and entrepreneurship. Ownership seems to have a substantial effect on five of these relationships, with the only exception being work and pay. (For more information about this culture framework, see Ownership Theory.
Federal and state regulations are wisely silent on how to achieve this new employment relationship. There are plenty of tools available, such as surveys, training modules and conferences to help light the way. But every company must chart its own course, gauging the expectations and the abilities of a workforce to take the next step.
Participation in Decision Making
Although all of the six relationships are important, decision-making may be the one with the deepest psychological roots. Several psychologists investigating cultural understandings of ownership have identified a degree of control as one of the primary defining characteristics of ownership. Given these deep roots, one psychologist wrote that "it would not be uncommon for the employee-owner to equate ownership with governance."2
Companies are not required by law to make any substantial changes to their top-level decision-making process, and in fact, most do not. Many companies are content with a "low investment" strategy in which they do not invest the effort or risk to make the company operate in a more inclusive way. Although these companies are unlikely to realize substantial benefits from employee-ownership, they may well experience slight increases in retention or find a handful of enthusiastic employees. If your company chooses this "low investment" strategy, we strongly recommend that you clearly inform your employees early on that they should not have expectations of being owners in a traditional sense of the word. You may wish to refer to their status at the company as being "investors" rather than "owners."
Companies that do seek to engage employees as active entrepreneurs working for the success of the company will find that it requires a substantial investment of time, attention, and resources. Many books have been written on the subject of how to do this. Here we want to make just a few points.
1. Middle Managers and Supervisors
This group is generally in the most difficult position in the company: while they usually had no role in designing or planning the change, they are the "face" of the company to many employees, and are charged with turning employee-ownership into a day-to-day reality. This change likely forces them to change management habits they learned through most of their professional lives. It is not surprising that levels of cynicism are consistently higher among middle managers and supervisors than among any other work force group. Companies should take steps to involve these employees as early as possible in the process, and ideally give them a role in its design.
2. Respecting Expertise
Any participative system that attempts to involve all people in all things will fail. While there will always be a small number of employees who expect to have a say in whatever decisions they imagine being made at the company, it is reassuring to managers to know that the vast majority of employees recognize the limits of their expertise and endorse the need for managers to continue to manage. The results in the chart below, which come from the Ownership Culture Survey™, indicate that 79% of employees at the average employee-ownership company agree that on some issues they should "leave the decision making to managers with specialized knowledge."
This raises a more fundamental question of how to ensure that the decision-making system is designed in a way that both respects the value of participation and acknowledges the importance of expertise. We have found that a clear delineation, in advance, of who will decide what issues is essential to creating realistic expectations as well as the psychological safety allowing a participation system to succeed. More information about such systems is available in Frontiers and Boundaries.
Embrace Complexity - and Teach It
Ownership is a complex idea. The legal details of most plans require dozens of pages to specify, and the real-life ideas that many people have of ownership adds a new dimension to the complexity. One psychologist concluded that "culturally and behaviorally grounded conceptions of ownership may not coincide with explicitly legalistic conceptions."3 In the day-to-day reality of an employee-ownership company, all of these competing meanings collide. For example, as part of the Ownership Culture Survey employees from a single 50-person company gave the following interpretations of the phrase "employee-ownership": "investment," "incentive," "teamwork," "bogus," "equality," "a good benefit," "employee involvement," and "what is it?"
These diverse opinions, are the starting point from which employees will understand company communications about the ownership plan. Acknowledging complexity means resisting "either/or" in favor of "both/and." It means understanding and working with both the economic and the moral content that people bring to the concept of ownership. Progress in the arena of employee ownership practice may well lie in a deeper consideration of each of these realms and to the bridges that should be built between them.