Warning, this is just some musing.. I haven’t done research. I haven’t convened a roundtable of deep thinkers in human resource professionals and MBA’s. I’m just thinking off the cuff about equity, compensation, and the idea that the real secret sauce to long term wealth building revolves around equity. Bill Gates isn’t the on again and off again wealthiest man in the world because of his salary when he was CEO, it was his ownership position in the company.
Bill Gates isn’t the on again and off again wealthiest man in the world because of his salary when he was CEO, it was his ownership position in the company.
We have a system to compensate CEO’s. It’s a pretty good design, we give them a very high (but reasonable based upon the size of the company) base salary and then a bunch of spiff’s, the biggest of which is stock options. The idea behind the stock options is that they are incentivized to drive the value of the company higher. This is where we see the insanely high salaries of CEO’s come from.. if they are driving value, then they are seeing stock growth and crazy high compensation. In short they are benefiting from a substantial equity position.. they are given significant ownership, if only for a time, in the company. There are bits of this system that trickle down to the core employees and individual contributors. There are the employee stock ownership programs, the programs that are based on bonus if they hit their bogie, stock grants, etc.. All smaller versions of the CEO’s comp package, or maybe it’s safe to say that the CEO comp packages are just employee bonus programs on steroids. Unfortunately this generally is only given to high demand employees, not the rank and file. Over time, this can create wealth.. think the Microsoft Millionaires, or Dell Millionaires. People who got stock ownership when the company was small and then benefited when the company grew.
But the vast majority of professionals don’t win this particular lottery. At best they get quarterly bonuses measured in the thousands or tens of thousands.. At worse, especially with the average time on the job being measured in just a few years, they don’t get the benefit of longevity in their options. Also, with different organizations offering different standards for this bonus compensation there isn’t a generally accepted standard. This is especially true if you get into the downward spiral of job hopping because of a bad choice or an unlucky happenstance. In short we wind up with a situation where are stock haves and the have not’s.
So the thought occurs to me that the solution revolves around equity and seniority transportability.
What if culturally we had standardized way to compensate even rank and file employees with an equity position and it was standard across all jobs, possibly even legislated as a function of being a publicly held corporation. Say at least 25% of the profits goes into stock purchases, or there is a formula for an allocation of new stock. This stock needs to be held in reserve distributed evenly across the organization based upon years of service and based upon rank. Ok, that’s step one and very similar to what we have now. This only really helps people who have been around a singular company for a long time.
Now what if that percentage of stock related to seniority was granted based upon your seniority in the workforce.. i.e. transportability of your seniority. Let’s call it a wealth allocation.. so you get something like 1x shares / month for your first ten years of service in the workforce, 2x shares per month your second ten years, but the shares, like your retirement plan are going into a 3rd party wealth bank. It’s similar to a depositing into an IRA in its allocation but the difference is that this is pure wealth building directly related to your specific efforts, not the economy at large. Teh individual can use it however they want so when there is enough you can start to really enjoy the benefits. The stock stays in the particular company, so if you were there for three years before the company exploded in value, but then it does you get the benefits of being in on the ground level like you were one of the founders. When you move to another company your seniority comes with you, and the new company pays out your wealth allocation and you get the share based upon your seniority.
There problems to be sure.. How do you handle it when companies continually want to hire younger and younger employees because they want to game the stock? How do you keep employers from gaming the numbers in favor of original owners.
I do think that if we have more wealth in the rank and file, more wealth where a greater percentage of the workforce is working more because they want to than they have to, the entire system will get better for everyone involved. Employers will have less risk averse and more creative employees, the workforce will be treated better, and anyone who put in a lifetime of work can really enjoy the benefits over time.
That’s something I can definitely take stock in.