“Profits are the reward for doing a better job.” Doc Blakely Before you get ready to cut your employees a few shares of stock expecting to motivate and bind them to your company, read what happened to Ronnie. It might change your mind. When Ronnie started his metal fabricating company he vowed he’d create a team of individuals anxious to build a new company. He wanted enterprising people--employees unafraid of shedding the security blanket for an adventure with opportunity and not having an eye on the time clock. Ronnie was no slouch. He read up on the latest in management theory and leadership. He believed in fostering an atmosphere of teamwork, optimism, and enthusiasm for his company’s goals. Ronnie hired well, he surrounded himself with his team--five intelligent and experienced folks. Vowing to make his company “their company,” he gave each of them a piece of his business. Ronnie believed that if employees had a stake in the business, they would give a 110 percent effort. After all, he believed that the more successful the company became, the more he would benefit. True to his personal management philosophy, he gave each of his five employees, a 5 percent share of the common stock keeping 75 percent for himself. For the first few months it was a great team. Everyone was excited about building “their company,” but then the problems began. The novelty of being an “owner’ faded. The employees with their growing families to support needed cash, not stock certificates. When Peter Tompkins quit, the first of the original team to resign, Ronnie was surprised and hurt. After all, he had made Peter an owner and now Peter was disloyal and ungrateful. To make matters worse, the gift of stock was a problem. Peter suggested Ronnie buy back his shares. To Ronnie, laying out cash for equity he willingly gave to key employees was a bitter pill. He felt betrayed. And as cash flow was a problem, buying back his own stock was a cash drain he did not need. Ronnie demanded Peter return the stock. Guess what? It was not long before two lawyers had two new clients. Ronnie was sorry. Sorry he had made his key employees owners. In the end Ronnie was forced to purchase the stock. Peter and he parted on bitter terms. If like Ronnie, you think of yourself as an enlightened entrepreneur who knows the value of stimulating and holding on to key employees, share your profits, not your ownership. While building a team and rewarding your employees can pay handsome dividends, a better arrangement is profit sharing. If they quit, no problem. You never have to buy them out. How much of the profits from your bottom line you want to share is up to you. However, it’s probably worthwhile to get your accountant’s advice on this. Remember that you need to grow your business with the cash from profits. I’d suggest you limit your total generosity to no more than 25% of the after tax net profit. Anything more may hurt your cash balances too much. Since your purpose is to motivated your “team,” you’ll find that a yearly award is less effective than cutting a profit sharing check every three months. After all, isn’t the purpose of dividing the spoils to push the troops to the edge of the envelope? If they have to wait a year to taste their share, it will be easier for them to lose interest over a twelve-month period. But if a profit sharing check arrives every three months, your employees and their families will get excited and that’s important. An old ploy with sales contests is to send the spouse announcements of possible awards tied to the employee’s performance. Nothing like a little pressure from the home front. If you are looking to build a team of employees who really feel that they are a part of your organization, sharing a piece of the pie is a strong motivator. Lest you forget, you are neither Santa Claus nor being generous. You are seeking to push your worker bees to make you more money. It’s an employee motivation tool, not goodwill or a gift. Copyright 1999-2002 Paul E Adams Dr. Paul E. Adams is a syndicated columnist, entrepreneur, Professor Emeritus Ramapo College of New Jersey and the author of Fail Proof Your Business: Beat the Odds and be Successful.