Consultants agree, giving glowing accounts of how much more motivated, how much more "team-oriented" executives become when they have a personal, financial stake in the company's future. Whether the game is attracting, developing, or motivating executives -- or trying to foster a certain corporate culture -- equity is the trump card that small, growing organizations hold against larger competitors. And deciding whether or not to play that card is becoming an increasingly inescapable part of designing a compensation package.
At first glance, equity wouldn't seem to be much of an issue for the overwhelmingly private, closely held companies that dominate this year's INC. survey. The average company's stock is 86% internally held, and while the vast majority of it is held by the CEO-owner, a quick perusal of the executives in other positions shows that about half of them own stock, and that the average equity position runs as high as 26%. Many of these shareholders, however, are co-founders. Rare is the company that is using equity as a long-term incentive for other executives. A mere 9% report having a stock-option plan, and other equity or equitylike vehicles -- such as nonqualified stock, stock grants, and phantomstock plans -- come in at 2% or less. Eighty-five percent of the respondents report having no long-term incentives at all.
Many owners have a difficult time seeing equity as a compensation tool; to them, it is a highly charged, emotional issue. Their business is just that -- their business -- and they are extremely reluctant to give up any part of it. The personal and economic sacrifices they, and their families, made to get the company off the ground are just too fresh in their minds.
"When you give up equity, you're giving up quite a bit of profit and capital appreciation," explains Gerald Frank, chief executive officer of Greenacres Gypsum & Lime Inc., in Spokane, Wash. He and his five co-owners have discussed giving stock to some of the company's up-and-coming managers, and so far, they have chosen not to. After several years of struggle, "we have a very profitable company," Frank says of the $2-million nonmetallic-mineral-processing operation, "and all of the stockholders feel as I do -- it's just too good right now."
"It's basic greed," says Robert Kramer, vice-president and partner of Brookdale Plastics Inc., a $1-million manufacturer of thermal-formed plastic in Minneapolis. "People who are reluctant to give away equity are people who don't feel they have enough money."
Not that Kramer doesn't understand the syndrome. Only a year ago, he and his partner were "brown-bagging it, sharing leg space under a desk," and drawing no salary whatsoever. "When you're in that survival stage, the last thing you want to talk about is giving away profits -- especially when there are barely enough to feed the company. But I think that when you get to the growth stage, if you sit down and analyze it, you can see the benefits." He and his partner, in fact, have considered giving equity to a new member of the executive team. Why? "You just have to presume a guy will take better care of his own company than he would some one else's."
Paradoxically, that is exactly what many CEO-owners fear most: The new stockholders might ask too many questions, offer too many opinions -- expect too much power.
"It's kind of a phobia with many entrepreneurs -- a crack-in-the-dam sort of thing," says Jerrold Bratkovich of Hay Management. "Giving up 10% of the company isn't going to make one iota's difference in their ability to make decisions or run their companies. But they figure if they give up even that much stock, pretty soon they'll only have 49%. So they are very unwilling to give up any at all."
Some owners, having become convinced of the merits of sharing equity, but not of their ability to retain control, have nevertheless found ways to work around their anxieties.
Kitchen Concepts Inc., a $3-million, Taunton, Mass., company that designs, installs, and distributes kitchen cabinetry, is rewriting its bylaws to prevent a new stockholder from exerting too much influence. "We were a 50-50 partnership, and we were each willing to give her 5%, but we didn't want to give her the ability to throw the vote," says CEO Cameron Snyder, so he and his partner set up a board of directors, and required a two-thirds vote on all decisions made.
There are others, however, who say that equity is worthless if it doesn't carry the opportunity to affect company policy. What is the point of owning stock, they ask, when the CEO can still countermand anything the minority shareholders propose?
The point, says Peat Marwick's Peter Chingos, is reward -- and motivation. "The executives on the second tier are typically making about $50,000, and giving their all for the company. They want equity as compensation for past service and for that feeling of being part of the team. It's not for voting control."
That is why phantom-stock plans -- in which no real stock is issued, but shareholders profit from the increased value of the company over time -- are often as welcome to many executives as the real thing. Only nine respondents to the INC. survey listed using such plans, however. Blame it on lack of awareness, the compensation experts say, and on the preoccupation of many CEOs with confidentiality.
