The Real Equity Incentive;

 

Few owners of small companies relish the idea of taking on their employees as partners and minority shareholders, but that was not the case with Gordon B. Lankton, president and chief executive officer of Nypro Inc., a highly successful plastic injection-molding company in Clinton, Mass. He inaugurated the company's unusual stock bonus program 17 years ago, and he has never regretted the decision.

Created in 1969, when Nypro was a struggling $4-million business, the plan was designed to encourage employee commitment and achievement by making equity available to people throughout the company. Eligibility is based on a formula that takes into account three factors: length of service, salary level, and job performance. Every year, employees receive points in each category. If an individual scores 20 points or better, he or she can receive a special equity bonus.

The equity takes the form of real stock. The program is not an employee stock ownership plan and uses none of the tax advantages associated with ESOPs. Nor does Lankton view phantom equity as a viable alternative in a company like his. "I want [the stock] to feel real," he says. "You can explain phantom stock to people who are financially sophisticated, but it can be incredibly confusing to everyone else."

As Nypro has grown -- today, it is a $65-million company with 1,200 employees -- some 90 employees, about half of them nonmanagers, have become shareholders. Meanwhile, the value of the stock (measured by book vaue) has shot from $3.50 a share in 1969 to $25 last year. To discourage employees from leaving, Nypro requires departing shareholders to sell their stock back to the company over a period of 5 to 10 years -- thereby minimizing the impact on Nypro's cash flow.