Why Sharing Ownership Could Be More Painful to You then Valuable to Participants

The dollar you give to employees in ownership usually feels like a lost dollar to you. Unfortunately, it probably does not seem like a gained dollar to your employees. That asymmetry has been the cause of a lot of hand-wringing among companies that share ownership, as well as a lot of mismatched expectations about how employees will (and should) react. Understanding why this asymmetry exists, however, can help make plans more effective.

Classical economics-what most of us learned in school-is premised on the notion that people make economically rational decisions. For instance, if I offered you a guaranteed 15% return on an investment over a one-year period, you'd be irrational not to take it unless you could make more money doing something else. The assumption makes for a lot of very elegant formulas, and has helped us understand how markets work. But in recent years, the notion has been challenged by behavioral economics, which says that people are complicated and often make decisions based on non-economic considerations, some rational, some not.

Two of the things behavioral economists have found of special relevance to employee ownership are that 1) people value the risk of loss more than an economically equivalent risk of gain, and 2) people excessively discount the time value of money. For instance, researchers found that people were more willing to take a double or nothing bet if they had lost $100 than if they had won $100. Most people would also rather have $5 now than $10 next week.

Translate these concerns to stock. Employees routinely can buy stock in public companies at a discount through employee stock purchase plans (ESPPs) and turn around and sell it right away. All they have to do is set money aside over a several-month period. But only a minority do because they value current income too highly (albeit those who are living paycheck-to-paycheck can't). When a company grants a stock option that won't vest for several years, and, if it is a private company, has no specific way to become liquid, employees will discount the present value of the option by well over half of what an accountant would say the present value is. When employers set up an ESOP that also vests over time and does not pay out until some time after termination, employees may not see it as real money.

So what can companies do? Part of the answer is to understand that people are not just being dense. They are just being people and probably responding in much the same way that business owners would if they were in a similar situation. Sharing ownership still can be a very valuable tool; just don't expect employees to view it the same way a someone who is sharing the ownership will. Second, spend a lot of time educating people about issues like the risk/reward ratio, the time value of money, and what kinds of guarantees are in place for their ownership to be liquid. Finally, get people who have benefited from you plan (or another plan if yours is too young) to come talk about what they did with the money, making the ownership more concrete.