Almost everybody expects to recieve finacial compensation for the work that they do. All else being equal companies who offer better compensation packages have a big advantage in attracting
and retaining talented individuals. How does a company reward employees for the work they do and let them share in a company's sucess?
This forms the basis of any compensation package. During the Internet bubble smaller companies surviving out of working capital (as opposed to Venture Capital or IPO funds) were at a
disadvantage. They simply could not compete with bigger established firms or heavily funded start-ups. If the payroll is too high it's difficult to find capital to grow the company even if the
business has excellent economics. Lately staff in technical or Intenet economy positions have been looking at more realistic and sustainable salaries.
Salaries tend to be fixed amounts. If the company makes large profits it may not feel the need to share these with the staff as they have a salary and do not share the risk. Companies cannot
really move salaries downward without it having a big impact on morale.
Precisely because a salary forms the basis of a compensation package is is not something exciting with which people can be tempted. The necessary rarely becomes as coveted as the possible.
How much should a small growing company pay in comparison to the market rate?
In a listed company these should form part of every compensation package. Staff who own part of the company take it more seriously. They tend to work harder, try and keep down costs, and
contribute in other ways to make the company a sucess.
The problem with going public is that a company often loses its independance and the ability to change strategy or invest for the long term or simply in the interesting rather than the profitable. The market demands consistent short-term
sucess and companies often play a games of fooling their shareholders. Venture Capital companys are even more controlling and demanding.
How many share options should be given?
How long should it take the shares take to vest?
Is there a way to avoid the disadvantages of going public?
This is quite an interesting one. This essentially means the comapny takes a % of the years profits and divides it up amongt the staff according to vairious criteria. This can be done via a formal
profit sharing program or via a bonus scheme. Formal profit share schemes can be used as an incentive to attract staff, ad-hoc bonuses are not as enticing. Profit share schemes should motivate
the staff but perhaps not as much as share options.
The problem with profit sharing is it takes money out of the company that could be used for growth, it's like compaines paying a dividend. Warren Buffet prefers companies whose shares he owns
not to pay dividends if they can profitably reinvest the money. If a company agrees to pay out 50% of it's profits to its staff it may not be able to take opportunities for further growth that that
money could have offered. If the staff have shares in a company growing at a rate of 40% this would probably be a far better growth rate for their money than if they took it out of the company.
and invbested it elsewhere (like a new car!)
Should a company have a profit share program?
How does a company share profits yet still have money availible for growth?