Small business owners are often tempted to offer stock to key managers and employees as an incentive for them to stay and grow with the company. When an employee asks for stock as part of his or her compensation, business owners often see this as a vote of confidence from staff and a way to save cash. Here are the top 3 reasons why you should NOT hand out stock or stock options to your sales staff:
1. Sales people are motivated by cash in-hand – There isn’t the level of M & A activity in the market that there was 10 years ago, so there is a greater prospect that the stock will not turn into cash in the short term and the novelty of owning stock will quickly wear off, reducing its effectiveness as an incentive. Most sales people are excited by the prospect of receiving cash for their efforts and many companies that might want to offer stock as an incentive don’t even have an exit strategy that would turn the shares into cash. Entrepreneurs often ask me how to arrange stock for their employees and I often ask what is motivating the request in the first place? If it is cash, then there are other approaches that are more likely to trigger a cash payout.
2. Lack of experience – few people have started a company or owned stock and therefore few people are likely to value the stock as much as the owners and shareholders. In most companies that have a stock option plan, only 5-15% of all company stock might be reserved for key staff and executives in a company, with any one employee gaining access to a small portion of the available stock. No one under the CEO is likely to get a double figure option plan unless they there with the company from the start, invested cash, and stayed up nights worrying about how to make the company a success. Learning this may be a disappointing for some employees who consider themselves to be a primary driver of company success.
For example, I have been in several situations in which an employee (with considerable experience I might add) expressed an interest in owning shares. When I asked what they were looking for, they defaulted to some model whereby the 100% of the company is roughly divided by the the number of staff to create a sort of share-per-head mode and that’s what they wanted, plus or minus the value they assigned to themselves. Ironically, in these conversations, the amount ownership desired often comes in around 10-20% no matter the situation and an awkward conversation about the facts of life then occurs.
3. Paperwork Nightmare – every added shareholders exponentially increases the costs and effort required to operate the company at the corporate level and if not structured properly the ramifications can be catastrophic. I know of one company that made its first 30 employees shareholders. Over the course of the next few years, the company required several rounds of investment and spent tens of thousands of dollars chasing all of those shareholders for signatures to approve the share sale. If the company were to entertain acquisition, every one of the shareholders would be entitled to know about the discussions and again would be required to approve the sales, which could create a nightmare situation for the company founders.
There are many ways to motivate your sales staff to drive more sales and incent them to stay with the company, but stock options grants should not be at the top of your list.
Eliot received his B. Comm. from Carleton University and has been honored as a Top 40 Under 40 Award winner.
He co-authored Sales Recruiting 2.0, How to Find Top Performing Sales People, Fast and provides regular insights on sales team management and hiring on the Peak Sales Recruiting Blog.
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