A short time ago, I received an email from a young man who is also an entrepreneur and a friend of mine:
During the last two years, a lot has happened and our small IT company now has seven employees. For next year, we are again seeking new employees. We are also wondering how to improve salaries in general without threatening our financial situation – in case matters will at some time not be so rosy.
Now I would like to ask you if you have experience with employee involvement or if there is somebody you could refer me to. Since we do not specialize in one product, generate a lot of cash flow with custom-made goods and also do not wish to sell our company, the question might be a little more complicated than it initially looks.
Would there be a chance for you to feel like and have time for coaching us in this matter in the near future?
Naturally, my answer was YES. But it was not because I wanted to coach them. That is something I refuse to do as a matter of principle. I also do not like to give advice. After all, advice can turn vice. Instead, I share my knowledge and ask questions.
First and foremost, I checked If I had ever before written anything about employee involvement in my entrepreneur’s diary (Unternehmertagebuch). Since the answer is no, I will relate the results of my discussion here in the blog.
Let me start with my own experiences:
As a matter of facts, fairly shortly after the foundation of the InterFace Connection GmbH (for us, the name Connection was more than just a name, it was programmatic) in 1984, Wolf Geldmacher and yours truly decided that we wanted to offer all employees (and even in 1986, we are talking around twenty) shares of the enterprise.
At the time, we were four partners in the firm. The “active” ones were Wolf and I. We were both employees of the Connection as managers and both owned 30% of the capital. The two “passive” partners in the firm were Dr. Peter Schnupp (a man who had written IT history) and the InterFace Computer, represented by Claus M. Müller. They had 20% each. At the time, our capital was as much as 100,000.- DM and our legal status was limited liability company.
Dr. von Hase was “our” counsellor-at-law. He accompanied our enterprise during many years. In retrospect, I can certainly say that his advice was always very good advice for the company. It did not take long for him to convince us that the limited liability company status was not the best possible for an enterprise with several partners. Especially if some of them are also employees. Conflicts that, for example, might arise from the enterprise-employee relation might easily have a negative effect on the partnership level.
Consequently, 17 employees of the IF AG founded a share association that took 10% of the capital (10,000 DM) out of the entire sum (100,000).
The sales price for the 10% was 60,000 DM (10,000 DM for the shares plus an extra rate of 1:5 , i.e. 50,000 DM). At the time, our enterprise was easily worth 600,000 DM. The money remained in the company as backup, which improved the capital situation (from 100,000 to 160,000 DM). The total shares situation changed as follows: Wolf and I now held 27% instead of the 30% we held before the transfer. InterFace Computer and Peter Schnupp now had 18% each instead of the 20% they had had before. And 10% were now owned by the shareholder association of employees who then mathematically held a share of 1/170 each of the enterprise. It was a good example for a successful employee involvement.
For the employees, one disadvantage was that they could not directly own shares of the enterprise, instead “only” indirectly holding shares as an association. This limited the fungibility of the shares. When, in the late 1990ies, the InterFace Connection GmbH became the InterFace AG, the shares of the employee association became stock of the InterFace AG, which meant this limitation was no longer active. Whenever I meet InterFace AG employees today on general meetings, they tell me that the employee involvement was the best investment of their lives.
In the 1980ies and especially in the 1990ies, many persons worked with option models in Germany that were rather dubious affairs as far as tax was concerned. The procedure was particularly attractive for young and quickly growing enterprises that wanted a speedy entry into the stock market. I have a few scattered friends who actually – to their own surprise – became millionaires because of these models. Mostly, however, the persons I know who did it tended to lose money, rather than profit.
Today, I believe cooperatives are probably something to keep in mind when this is your purpose – especially if you want to think sustainable and long-term. Even though originally the cooperative model was not intended to be beneficial for employees. Initially, they wanted to share the use of production machinery and buy said machinery. But it will also work if you want to make it possible for employees to share the success.
To me, partner models such as those used for entrepreneurial counselling look rather innovative. Especially the varieties where you can buy shares upon entering the firm and have to hand them on as you leave sound exciting, With them, you will profit from the success and growth of the shared enterprise in all the time you are part of it. If I were ever to found a new company, I would probably try the BGB company partner model.
During our discussion, we also looked beyond the “pure earnings”. To be sure, a market-oriented income plays an important role when it comes to the employees’ motivation. In fact, salaries and continued education are the most important costs in service companies. It goes without saying that enterprises find it easier if they only need to pay part of these costs if they are actually successful.
However, money is only one (even if an important) part of what constitutes the relationship between the enterprise and its employees. The entrepreneurial culture and the values lived in the firm are just as important. Catchwords are openness and transparency, the possibility to participate, as well as respect and appreciation of all the persons in the firm being a foregone conclusion.
In an enterprise, you should feel that all the employees share the courage for the future and find pleasure in doing what they are doing. “Strategy” should be something like a shared feeling, rather than just words. The enterprise should not just create value for the shareholders, but also for all the stakeholders. That includes the families of the employees. For partners and children of colleagues, the enterprise should be something they can “touch”.
And also – this is very important:
Success should (as often as possible) be celebrated together!
RMD
(Translated by EG)
P.S.
For more articles of my entrepreneurial diary, click here: Drehscheibe!
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