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111 pp. (6" x 9"), softcover. $25 for NCEO members; $35 for nonmembers.
In recent years, there has been a dramatic increase in worldwide interest in employee ownership. This expanding interest has not been met by a growth in resources to help company leaders, employees, government officials, and business advisors understand how to think about ways to implement these plans, however. This book is an effort to help meet that need. It is not an effort to detail the specifics of country-by-country laws. Instead, it is a more conceptual volume, one that is intended to help businesspeople and government officials outside the U.S. think through the various considerations that would go into to setting up an effective employee ownership plan in their own country. Who should get stock? How much should they get? How should they acquire it? How can stock be valued in companies not on a stock exchange? How can employees be assured that they can sell their stock down the road?
This is not a guide for multinational corporations setting up stock option or stock purchase plans in multiple countries; for that, see our book Equity-Based Compensation for Multinational Corporations.
Preface
Employee Ownership Concepts and Models
Making Employee Owners
The Scope and Development of Employee Ownership Worldwide
General Considerations for All Stock Programs
Creating an Ownership Culture
Setting a Price on Company Stock
Final Thoughts on Establishing an Employee Ownership Plan
Glossary
By far the most common method for representing ownership is stock. Companies create stock because it provides a flexible way to represent units of ownership in the company. Laws, stock exchange rules, and customs in different countries, however, create a wide variety of ways in which stock can be created, held, repurchased, and structured.
In most cases, companies can assign different rights to different classes of stock, although their ability to do so may be constrained by corporate bylaws, national securities laws, or stock exchange rules. Most shares of stock are "common" stock, stock that carries voting rights, whose value fluctuates in direct proportion to the overall value of the company, and that may or may not carry specified dividend rights. "Preferred" stock gives its holders certain preferences, typically to liquidation rights (these owners are first in line to be paid after any creditors are paid should the company not be able to meet its financial obligations) and dividend rights (preferred shares usually pay a higher dividend). In return for these rights, preferred shares may not carry voting rights and usually fluctuate less in value than common stock. That is because owners of preferred stock have a higher claim on the current earnings of the company; hence they have a lesser claim on the terminal value (value of the company at sale or liquidation) of the company. Preferred shares almost always cost more than common stock.
Within these familiar forms of stock, companies in many countries have created more innovative approaches. For instance, some companies have "super common" stock, common stock with enhanced dividend or voting rights. Like preferred shares, purchasers of these shares have to pay more for the additional privileges. Companies might also create "tracking" shares, shares whose value fluctuates with a particular line of business of the parent company. National securities laws or stock exchange rules, however, may limit the ability to issue such shares.
The first question you must ask is how much stock will be available for employees. Generally, companies approach this issue in one of two ways. The most common is to determine in advance some percentage of total shares that the existing owners are comfortable in sharing. Unless employees pay fair value for the stock, sharing ownership dilutes the economic value of the shares already held by dividing the claims on the company's assets into more pieces. If employees have to purchase shares at a fair market value, however, this economic effect is offset by the infusion of cash, so that all owners end up having a smaller share of a larger company. Any ownership plan that allows employees to vote their shares, however, whether they buy them or not, dilutes control rights.
Owners' tolerance for this dilution will depend in part on what they see as the alternative to dilution. If all employees can only own 10% of the total shares, will this be enough to attract, retain, and motivate good people? If not, how else can this be accomplished? Will more current cash be needed to reward people, either with straight pay or bonuses? If more cash is spent, how will that effect future share price?
Other factors come into play as well, however. In companies listed on stock exchanges, there are often informal norms about how much dilution is acceptable, as well as formal rules requiring shareholder approval for dilution above certain percentages. For any particular company, the range of acceptable dilution may or may not be sensible, but going beyond the upper limit will be a signal to potential buyers that their investment will not be as well rewarded by other potential buyers of their stock as an investment in a more conventional company. These buyers may not bother to look through the dilution factor to see why the individual company is different. With so many choices to make, it may be simpler just to look elsewhere.
Copyright © 2002 by The National Center for Employee Ownership (NCEO) (phone 510/208-1300; email nceo@nceo.org; WWW http://www.nceo.org/). All rights reserved.
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