Do employees really need equity
ownership to give you all they've got?

    In the last year, some keen observers have suggested that perhaps not all employees want the reward of ownership in your growing advisory firm.
This is a novel viewpoint. First, because as advisory firms grow and garner more interest from research firms, a common wisdom is developing to the effect that equity ownership is what all employees ultimately need if owners want to retain them. Second, it's novel because it considers the human element in economic incentive mechanisms-something all too frequently overlooked.
    Essentially, the issue is whether or not there exists two types of employees: those who are by nature entrepreneurial, even though not presently running their own firms, and those who will make a strong commitment to you, if properly motivated, but don't want the risks that accompany ownership. And without conducting a scientifically designed study, it seems self-evident that this should be so.
    Therefore, from a practice management standpoint the question is, are advisors recognizing this dichotomy? Eric Hehman, who wanted and got a minority (and growing) equity interest in Austin, Texas-based Austin Asset Management says, "There are definitely employees who have made it clear that ownership is not a motivating factor for them and that they really don't want the responsibility or risk of being a partner. Employees who aren't motivated by potential ownership really value their participation on the team more than the opportunity to set the direction of the firm." Therefore, says Hehman, an owner must reward these employees with incentive compensation tied to their team-based efforts.
    However, he notes of the other "personality" found in his firm, "Potential owners can never get enough insight into the business and are almost starved for ways to make an impact." But sometimes an employee's inclination isn't so easy to discern, which led Don Patrick, managing director of Integrated Financial Group in Atlanta, to devise a simple test to ferret out what he calls the "entrepreneurs" vs. the "dedicated employees." "We offer new employees either a fair-market salary or a small salary with the balance of the compensation based upon [client acquisition] incentives. Obviously, the few that choose the second option are the entrepreneurs."
    But are incentives based upon client acquisition enough? Not for some. Jeffrey Zures, now of Sanchez & Zures in McLean, Va., says he and his partner had more than 14 combined years of experience with the well-known northern Virginia firm of Sullivan, Bruyette, Speros and Blayney Inc. Says Zures, "SBSB is an outstanding firm, however we experienced no correlation between the firm's profitability and our compensation," prompting Zures and Sanchez to split off from SBSB to get the equity rewards they felt they needed. Fortunately, says Zures, the separation has been amicable, and SBSB even refers clients to him and his partner since their minimums are lower.
    It's my own hunch that some firms never have to deal with this problem because they simply don't hire entrepreneurially minded employees. For example, Ernest Hathaway with Financial Strategies Institute in Midvale, Utah, says of his firm's four advisor/producers and nine-person staff, "We've found that equity and other long-term rewards are not as appealing to our employees. Most of them simply want an opportunity to share in the profits."
At the other extreme, Bart Boyer's Parsec Financial Management Inc. in Ashville, N.C., gives all its employees the opportunity to purchase company stock. "My plan," says Boyer, "is to spread ownership broadly enough so that the firm does not have to be sold when I retire, and I can simply keep most of my shares. Ideally this should be started at least 15 years before an advisor plans to retire." Boyer's plan points out how succession planning can influence a firm's hiring tendencies and ownership policies.
    But, says Alan Gappinger, chairman of Heartland Institute of Financial Education in Aurora, Colo., "It's important for a firm's owners to recognize the value of both types of employees. A program that provides profit-sharing, bonuses and deferred compensation agreements supports the non-entrepreneurial folks, while a stock arrangement or partnership, which may be based on results and/or contributions, helps to encourage and motivate the entrepreneurs."
    By now, you should have a clearer idea of where your firm falls between a heavy emphasis on shared ownership (and employees who require equity) vs. a heavy emphasis on team players who prefer to subordinate themselves to a firm's owner, as well as the middle ground where firms employ both types. Now, you just need a blueprint for how to best motivate each employee.

Rewarding Entrepreneurs
    If yours is a smaller firm, you'll probably want to extend equity ownership to only one, or a couple, of key employees. Perhaps that person is someone you're grooming to succeed you as the sole owner of your firm. There are various ways to do it.
    Joel Shaps, president of Bedrock Capital Management Inc. in Los Altos, Calif., is initially selling 20% of his firm to Eric Lewis, one of his four employees. Shaps hired Lewis, a Harvard grad, with the understanding on both sides that equity ownership would occur fairly quickly. And Lewis can afford to buy in, "a luxury not everyone has," notes Shaps.
    Perhaps it's due to Shaps' earlier experience with extending equity ownership to employees that he didn't hesitate to do it for Lewis. "In a former consulting business," he says, "I shared profits and then equity with employees, which was to their benefit when I sold the company. I'm very willing to share the success of my company with my staff."
    Boyer's system is slightly more complex in order to accommodate a large staff of potential owners. "All employees have the option to invest up to 20% of their annual income for the previous year in company stock. Whatever they put up we match at 50 cents on the dollar. Employees pay for their stock through payroll deductions," he says.
    The company's stock valuation is kept very simple, and is easily calculated at any time. "We price it at a lofty ten times earnings or two times revenues, whichever is higher." Boyer estimates that an employee buying $10,000 of stock each year, assuming 15% annual appreciation in the stock price, would, after 15 years, have invested $475,000 and own stock worth $1.83 million. Furthermore, they will have received approximately $745,000 in dividends along the way. That should be plenty of motivation for any employee even moderately inclined toward ownership.
    Considering offering equity to your employees? David Lewis, president of Resource Advisory Services Inc. in Knoxville, Tenn., offers one cautionary note about extending equity in the form of minority interests: "I have been a minority shareholder in a closely held corporation without a clear way to liquidate my interest. Feeling backed into a corner, I caused a great deal of trouble for that company until I finally received cash for my shares. I have always felt I didn't get a fair deal, and they have probably always felt I got way more than I deserved."

Rewarding Dedicated Employees (Non-Owners)
    What do employees not inclined to ownership want? The question implies more options than does ownership. For example, Pat Hinds' firm of Granite Financial Inc. in St. Cloud, Minn., successfully rewards employees not with profit sharing but with benefits. "Over the years, we've gone from just a retirement plan benefit to a full range of benefits including education reimbursement, health benefits and flex plan, life and DI coverage, and we've also offered flexibility in the work schedule of employees to allow them to meet family commitments." Hinds has found that his employees value the security they find in the form of benefits.
    Hathaway, as noted earlier, has found his employees are highly motivated by profit sharing. "Each quarter we establish a production baseline, which is the average of the last quarters' production. If we finish the quarter at 5% growth over the baseline, qualified employees receive an additional 7.5% of their salary for that quarter. Additional breakpoints are 10% growth resulting in a 15% bonus, and 20% growth resulting in a 30% bonus. This is paid in cash about 15 days after the end of the quarter, with lots of congratulations and a little hoopla, so that everyone receives immediate reinforcement of their contributions to the firm's goals."
    Hathaway says he's been amazed at the positive effect this has had on his firm. "Staff personnel are more eager to help one another because they are contributing to a team goal with an immediate tangible reward."
    The lesson of this story, then, is to have a clear vision of where you want to take your firm, including your own succession plan; hire to meet that growth objective, determining whether "dedicated" or entrepreneurial employees (or some combination of the two) will get you there; and devise the appropriate incentives. In the end, it may or may not be necessary to give employees equity to make your plan a reality.

David J. Drucker, M.B.A., CFP, an independent financial advisor since 1981, now writes, speaks and consults with other advisors as president of Drucker Knowledge Systems. Check out his practice management portal, Practice Lifecycle, at, and Virtual Office News, a practice management/technology newsletter for financial advisors, at