Does A/E Firm Ownership Potential Motivate Employees?
August 12, 2020
Historically, one of the incentives that employees at architecture and engineering (A/E) firms had to do high-quality work on time and on budget was that it increased their chances of one day being a partner in the firm. But what baby boomers are telling us that they’ve discovered as they prepare to retire is that ownership doesn’t have the same appeal to millennials.
In fact, the employees today that seem best suited to take the reins at a firm often see ownership as a risk, first and foremost, with the reward being a distant second. They see lots of hard work in their future if they decide to go after an ownership stake, and at best a small financial payoff and some added say in how the firm is run.
This leaves owners and the industry wondering what to do about this change in mindset.
Do Employees Even Want to be an Owner?
It used to be that employees selected to become owners earned that offer based on their behavior. You demonstrated owner-like attributes—caring about the firm’s “big picture,” bringing in work, managing projects and employees, etc.—and after a while, you were asked to join the ownership team. In other words, you had to prove yourself by going “above and beyond” what was required of your position. Today, firms are struggling with the question of whether the opposite approach can work—offering employees ownership to entice them into acting more like owners.
Clearly there are flaws in both approaches. In the past, firms that were slow to recognize owner-like behavior often saw key employees leave to start their own competing firms. Today, firms face the issue of not knowing whether the possibility of ownership will even be a motivator.
They also have to deal with the frustration of boomers who had to work hard for years before even being considered for ownership and were grateful when the opportunity arose, while younger employees seem to look at things in an entirely different way. And this difference in perspective can quickly damage cross-generational relationships, driving even more architects and engineers to seek the comfort and security of jobs with large, corporate firms.
"Firms are realizing that the people who have the capability to sustain the firm’s operations and management should rightfully end up
owning and guiding it."
Mid-Sized Firms Get Hit Hardest
We’ve found that this ownership dilemma tends to hit A/E firms in the 50-150-employee range the hardest. Both large firms and small firms seem to have no trouble finding potential owners within their ranks. Medium-sized firms, however, have to shift away from the old approach of ownership behavior preceding ownership and instead offer ownership as an incentive but with a “safety net” in place in the period when new owners are learning to act like owners.
The old belief and confidence that new owners would be “owners for life” because they’d already proven themselves is gone. Today, shareholder agreements have to be written such that new owners who aren’t succeeding can be relieved of their ownership duties and stake if it turns out that they aren’t ownership material. And this reality can make employees who were lukewarm about ownership anyway even less inclined to accept an offer, especially since there’s really no graceful way to return to your old position if you’ve been “demoted.”
The Rise of Broad-Based Ownership
One approach that we’re seeing more today is the idea of broad-based ownership. Historically, ownership was restricted to a small number of people. The ratio of owners to employees was commonly 1:15 or 1:20. Today, many firms offer a very small ownership stake to virtually anyone who exhibits a small amount of leadership behavior. It’s not uncommon for half of the people in a firm to be owners.
As a result, the exclusivity that existed in the past is gone, and now ownership is an investment-only relationship. And firms find this can lead to significant governance issues. It shouldn’t, as these firms can implement the same kind of scenario used at large firms, where a board of directors makes decisions. But it takes time for firms to adopt this approach.
The ESOP Option
Some firms today are capitalizing on legislation that allows them to implement what’s called an employee stock ownership plan (ESOP). This structure makes everyone in the firm an owner. However, while it might be right for the firm, it’s important that owners not make an ESOP their “buyer of last resort” when they can’t sell to a large firm for some reason and don’t have anyone internally who is interested in ownership. That’s not a great strategy, since an ESOP isn’t an ownership model but rather an employee benefit. It may feel like broad-based ownership, but it isn’t in practice.
An Enduring Truth About A/E Firm Ownership
There’s no question that the industry’s perspective on ownership is evolving rapidly. But we’ve discovered that, like they say, the more things change, the more they stay the same. Whether it’s being invited to be an owner or to be on the more exclusive board of directors, firms are realizing that the people who have the capability to sustain the firm’s operations and management should rightfully end up owning and guiding it. And firms that get these high-achievers into ownership or onto their boards typically do very well.
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