Sharing equity with employees has been good medicine for any number of organizational ills. Now, about the side effects...
From: Inc. Magazine, May 1999 | By: Edward O. Welles
Where did the idea of equity as the Holy Grail of the new economy begin? A good place to look might be the once little known company out of Seattle that, in 1984, made the Inc. 500 (at #80), with sales of $50 million. Two years later Microsoft Corp. went public, laying the foundation for an edifice of wealth creation that would soon reach skyward with all the sun-blocking mass of a cathedral.
In the early 1990s the term Microsoft millionaire entered the lexicon, describing an almost new species of American worker. The implication was clear. There now existed a cadre of men and women who worked odd hours and wore T-shirts, jeans, and hiking boots--and received paychecks that were dwarfed by their stake in the company: fistfuls of suddenly deep-in-the-money stock options.
Before its public offering, Microsoft issued options to all its software programmers and top managers on staff; by early 1992 one in five Microsoft employees boasted a net worth exceeding $1 million. That signaled something radically new--the worker not just as owner but, if things broke right, as wealthy owner. Such a shift, in its pluralistic possibilities, was a sea change. Even the Silicon Valley of the 1970s and 1980s, for all its talk of egalitarianism, seems elitist in hindsight. There, the payout typically resulted in a few people driving Ferraris and building big houses up in the hills.
Wherever you look today, broad equity ownership is the lifeblood of American business--and not just in thoroughbred high-tech start-ups. In the last decade and a half, the total value of stock options outstanding has rocketed from $60 billion to $600 billion. One-quarter of traditional companies have broadly based programs in which nonmanagement employees participate. Two-thirds of technology companies give stock options to all employees. American workers now own an estimated 8% of total corporate equity through stock options, 401(k) plans, profit sharing, and stock-ownership plans alone. That's up fourfold from a decade ago. And there are some big fish--UPS, United Airlines, and Publix Supermarkets, to name a few--in which employees own much if not all of the company.
Equity, in its various forms, appears at all levels--and in all types--of organizations. Last year the typical big-company CEO received four times his or her base salary in options. At the various divisions of blue-chip behemoth General Electric--which are run as separate profit centers--managers are charged with investing surplus profits in promising start-ups, much like venture capitalists.
In the past two years it seems that an increasing number of stories in this magazine have had the thread of equity--in some form--running through them. Consider the cast of characters and the panoply of scenarios:
Equity is now the glue that binds in a newly dynamic business world. In an economy dominated by knowledge workers, it stands to reason that knowledge--awareness, really--replaces muscle. Moreover, knowledge is spread across enterprises, making it seem logical that the broad distribution of equity will follow. All but washed from memory is the now quaint notion that labor is destined to serve as capital's counterweight. Newly embraced is the logic of ownership and congruence--not confrontation--between management and labor.
But as equity introduces vitality, it similarly creates urgency. The newly unleashed competitive forces increase risk. Companies rise and fall at a faster rate. Innovation runs faster into the wall of obsolescence. The fruits of a global market are great, but then so is the cost of getting to market. The need to cut costs never lets up. And equity, accordingly, reveals its downside, a less than virtuous cycle in which an underperforming company--faced with volatile financial markets--loses people like rats off a listing ship. That syndrome yields a bitter irony: an equity stake in a business is intended to inspire loyalty, yet depending on how things go, it can encourage the opposite behavior.
The focus on--and fascination with--equity reflects the keenly felt need to create lasting value in the new age of economic paradox. Managing a business in the 21st century will amount to being perennially poised on the knife-edge of success and failure. Every business must, therefore, promise commensurately higher and higher rewards to its knowledge workers as compensation for the increasingly greater risks they will have no choice but to take. The new knights, after all, have embarked on a more alluring--yet ever more daunting--quest: success in an economy at once as perilous as it is promising.
Edward O. Welles is a senior writer at Inc.