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Sunday, November 25, 2007

Ownership and employees

PCL built Scotiabank Place in Ottawa, home of the Ottawa Senators hockey team. PCL has successfully adapted the employee ownership model

When and how should businesses share real shareholding equity with their employees? I am still unresolved about the best solution to this question, but know that how I answer it will shape and define the long-range viability of our business.

Businesses are usually started by sole owners or partnerships; sometimes partnerships work (especially if they are formed by mature people who know each others' strengths and weaknesses), but frequently they fail. At some point, the business hires its first non-equity employee, then a second, third, and fourth. As the company grows, a pecking order of managers and junior employees evolves.

Fair enough, but at some point the owner faces a key decision -- should any (or all) of the company's employees be invited to share in the company's ownership, or is there some better way to allocate ownership.

The business owner of course can say, "No, I'm the boss, its my business, and if any one owns it it will be my estate and children." And in fact many family owned businesses are able to pass control from one generation to the next.

Other businesses evolve over time into fully employee owned models -- I think one of the best construction industry examples is PCL Still others 'go public' allowing for employees to purchase shares in the corporation.

Finally, there are examples such as (out of industry) the Giant Tiger retail chain in Canada. Here, the business has grown by recruiting qualified retail managers to be franchise owners, while senior executives in the company's Ottawa head office are given shares in the business. This mixture of decentralized 'ownership' with some equity at the higher levels of the company creates a genuine ownership power among the executive ranks. But individual store clerks and cashiers are just that, employees (usually of the franchisee).

Now, here is why I am asking the question now. In my previous growth period, we had a hodge-podge of situations; we had employees on salary, commission, independent contractors, and one employee (in the U.S.) received the opportunity to acquire shares in the U.S. business. In the end, however, that employee behaved like an employee more than an owner -- interested in short term results, he pushed for activities that really didn't make sense in the larger business sense. Though I didn't realize it at the time, the only real solution was to have all of the employees and independent contractors leave (with one important exception, and it isn't me!) and rebuild from scratch. As things started falling apart, of course, employees fought each other, and lashed out at me. Yuck. I never wish to have a repeat experience.

So we've hired new employees, had them sign employment contracts, and with freshness and enthusiasm are now rebuilding the business. This is healthy, for now, but I am looking to the future. If we are going to build a business with adequate profitability and annual sales at least $10 to $50 million, we are going to need structures and a proper compensation/ownership structure reflecting the employees' contributions. Equally, I don't want to hand equity to employees only concerned about short term pay cheque-to-pay cheque values. We'll just give these employees fair pay cheques.

I'm sure some employees will contribute more than others; some will motivate themselves differently than others (no one can "create motivation" -- it is an internal process), and some could make great shareholding partners -- but when and how should this status evolve?

Maybe you have some thoughts or recommendations here.

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