How to Create an Equity Structure That Balances Shareholder Returns and Employee Compensation

People are the heart of what makes a company great. And in a services firm, where people are your only product, that premise is only magnified. When people are engaged and invested in their work, cultures thrive, businesses grow, and economies prosper, but as the Great Resignation morphs into the Great Exhaustion, it can be harder than ever to inspire individuals to realize their full potential.

Many organizations have found enabling employees to become owners can be a powerful measure and catalyst to engagement and job satisfaction; that’s certainly what we have found at Trinity Consultants. Engagement, of course, is closely tied to company performance as measured by customer loyalty, profitability, productivity, retention, quality, and more.

But the process of creating an equity structure that effectively balances shareholder returns and employee compensation is highly individual and nuanced. It requires a balance of short-term (salary), mid-term (performance bonuses and phantom equity [e.g., stock options]), and long-term incentives (the ability to directly own shares).

With new models of ownership, companies can take a variety of approaches when designing an employee equity program, broadening the capital structure, managing ownership diversification, and ensuring ownership opportunities across all levels. Here’s what leaders need to consider along the way.

How Ownership Models Have Evolved

The increase of private equity (PE) investment in the services sector has changed the landscape for privately held businesses. As recently as two decades ago, an owner of a small business had limited choices: They could transition their business to other founders or the senior leaders immediately beneath them; sell to a larger firm, probably receiving a relatively low valuation in the process; or create an Employee Stock Ownership Program (ESOP) to convert the entire company over to employee ownership. While each of these options have their benefits, they also come with their own set of challenges and implications related to culture and company performance.

PE firms today are increasingly open to flexible capital structures that include broad employee ownership, thereby allowing management teams to create company-specific combinations of PE and employee equity (which is what we’ve done at Trinity). This marries the capital and strategic expertise of PE firms with the power of employee ownership. This alignment can create better performance and a more motivated workforce. It can also play a pivotal role in succession planning and facilitating successful transitions of leadership, allowing retiring leaders access to full liquidity and bringing new leaders into the ownership structure in a meaningful way.

Designing an Employee Equity Program

An effective equity structure needs to strike a balance between being a retention tool for key employees and being sustainable for the business in the long term. Furthermore, it needs to support and not undermine your company’s culture. Start by deciding who within your organization will be eligible for equity. Eligibility is often determined based on the actual or potential impact of an individual on the company’s growth and success. For instance, many companies implement a partnership type model for equity ownership where individuals at certain levels are invited to become owners. Alternatively, some companies opt for inclusivity, which sends a powerful message that every employee has a stake in the company’s future.

The journey at Trinity began with a fundamental question: How can we create an equity structure that rewards employees fairly while also aligning their interests with those of our leadership team and PE partners? The answer was found in a carefully crafted employee equity program open to all employees, regardless of their role or tenure. This was a deliberate choice anchored in the belief that everyone in the organization contributes to the company’s success, and to maximize performance (i.e., shareholder returns), a broad ownership base is essential.

Broadening the Equity Structure

Broadening the equity structure in a company requires ownership opportunities that are attainable combined with financial and operational transparency. This can include giving more employees across different levels and departments the ability to own shares in the company, lowering minimum equity thresholds, and providing alternative mechanisms to fund initial investments. Furthermore, financial transparency across all shareholders, and preferably the entire organization, is key element for broad employee ownership to be effective.

At Trinity, employees can opt into a payroll withholding loan program that allows them to invest in the company’s equity over time. This program has been instrumental in deepening ownership and has boosted retention among participants following a recapitalization event.

The importance of education can’t be overstated, as a lot of people don’t understand how stock and options work. Consider developing webinars and materials to help people understand both the nuances of your program but also equity ownership in general. Expect to invest a significant amount of time on education, in advance of a recapitalization event, to help employees feel comfortable investing in the company. That includes sharing company financial performance on a frequent basis. Also, be sure to engage counsel that is well-versed on employee equity programs to be sure that your program is compliant with all applicable rules and regulations.

Managing Ownership Diversification

By providing new employees the opportunity to invest, you can allow longer-tenured team members to reduce their equity and diversify their portfolio while maintaining a relatively consistent ratio of employee to PE ownership. This makes for better future leaders and decision-makers. People can take more risk and actions to allow the company to grow when their entire net worth isn’t tied up in the company. The PE cycle leads Trinity to recapitalize on a periodic basis; this not only serves as a mechanism for us to continue evolving our five-year strategic plan but also enables us to refresh our employee shareholder base.

Ensuring Ownership Opportunities Across All Levels

Ownership opportunities can take a variety of forms that range from phantom equity to direct stock ownership. At Trinity, we’ve created a balanced compensation structure where employees feel valued in both the short term (via salary and bonuses) and the long term (via stock options and company stock). This is evidenced by the fact that we have nearly 100 employees who’ve worked at the company for 20 years or longer and more than 500 employee shareholders.

Above All, Keep Evolving

Your company’s equity structure should be designed to be flexible and responsive; it’s never going to be static. You need to evolve it as your organization’s needs change, and if you are paying attention to what’s going on and talking to your employees, the friction points you need to address within it will be clear. 

So keep thinking, keep planning, and keep evolving. By understanding your culture and what you need to do for your business to be successful, you can make the ongoing adjustments needed to ensure that your equity structure remains aligned with the company’s goals and the needs of its employees.

Paul Greywall is CEO of Trinity Consultants.

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