You too can be the owner

Cristina Simón. Professor. IE Business School

13 December 2010

Distributing shares among employees has proved to be an effective way to increase workers’ commitment to the firm and improve company performance.

With the exception -as usual- of North America, companies do not often offer shares to employees. A good number of companies offer their executives and occasionally the more operative levels of management some type of share-based plan (whether they be real or in a stock-option-type deferred format). But taking the step of inviting workers en masse to assume the role of shareholder is a less common qualitative leap.

Telefónica, one of the largest telecommunications companies in the world, has just launched its Global Shares Plan. The plan, which was announced and adopted at last year´s Shareholders Meeting, invites each employee to purchase the equivalent of up to a maximum of €100 per month in the company´s shares for one year. If the worker maintains his/her investment for another year, the company promises to give them an additional share for each share purchased. After the corresponding filters have been applied (a certain number of years working at the company are required and not all the group´s subsidiaries can take part), the plan applies to potentially half the company´s staff (approximately 120,000 workers).

From the human resources viewpoint, the idea is particularly positive for several reasons. First of all, investigations carried out in recent decades have systematically shown that the corporate performance of companies with employee action plans is higher than companies of a similar size and in the same sectors that do not have such plans. The American NCEO (National Center for Employee Ownership) monitors the dozens of studies carried out on the subject and almost all of them report better indicators for growth, profits, return on capital and productivity. The numbers appear to add up.

If we analyse these plans from the employee´s viewpoint, the sense of belonging seems to be clearly strengthened. Even though a giant-size company like Telefónica does not generate the illusion of ´being the owner´ by owning €1,200 in shares, workers undoubtedly feel that their role in the company increases.

Including employees and shareholders also makes them aware of the importance of indicators that are very often far removed from their daily work, such as the stock exchange value, for example. When this type of plan is put in place, it is interesting to note how the queries on the shareholders page of the corporate website increase or how a growing number of employees go to work in the morning with the financial papers under their arms. Although it is a very small proportion, investments in shares give rise to an interest in what makes share prices increase and how they compare with other companies, etc., which provides a better understanding of how the company works on a financial scale.

Telefonica says that it has set itself the target of generating greater commitment and involvement from its workers. There are basically two other reasons to make companies launch a share-based plan: an increase of funds in response to financial requirements; and an attempt to retain employees at complicated times, such as during a merger or acquisition that involves a high risk of rotation. One recent example of the former can be found in Mexicana de Aviación, the fourth-oldest airline in the world and one of the most important in Latin America. It has launched a similar offer to contribute to an increase in capital that will allow it to overcome its current financial difficulties. The experience also shows that in these cases those involved react very positively by making an extra effort to keep the business afloat.

The system does not work so well when it is used as a retention mechanism. It is true that the offers are usually substantial from a financial point of view, which is always a great incentive; however, announcing these policies in an every-man-for-himself climate usually generates a lack of credibility, especially if the offer focuses exclusively on stock options and is not complemented with interesting projects or outlooks for the future. As professionals, we are becoming less and less convinced by purely financial incentives and more and more convinced by the value our work provides. Consequently, the case of Telefónica is a good example because it represents a company´s desire to share with its workers the translation of their own performance into value for its shareholders.

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