workplace culture and global equity session 5b: issues for companies with mostly non-highly skilled...

Workplace Culture and Global EquityWorkplace Culture and Global EquitySession 5B: Issues for Companies with Mostly Session 5B: Issues for Companies with Mostly

Non-Highly Skilled EmployeesNon-Highly Skilled Employees

2001 Global Equity Compensation ForumNovember 6, 2001

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Creating an Creating an ownership cultureownership culture at at a a global organizationglobal organization with mostly with mostly

non-highly skillednon-highly skilled employees employees

• Stock Purchase Plan (SPP)• Stock Option Plan (SOP)• Employee Stock Ownership Plan (ESOP)• Savings or Profit Sharing Plan

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Companies with Global Equity Plans

• Allied Signal/Honeywell (SPP)

• Bombardier (SPP)

• Case Corporation (SOP)

• R.R. Donnelley (SOP)

• Guidant Corporation (SOP)

• Ingram Micro (SOP)

• Johns Manville (SOP)

• Kimberly-Clark (SOP)

• Merck (SOP)

• NCR (SOP)• Nokia (SOP)• Pfizer (SOP)• PPG Industries (SOP)• Proctor & Gamble (SPP, SOP)• The St. Paul Companies (SOP)• Sonoco (SOP)• Tellabs (SOP)

SOP = Stock Option PlanSPP = Stock Purchase Plan

Ownership CultureOwnership Culture

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Culture Defined

• The taken-for-granted way of doing things• The unwritten and written policies and procedures that

guide behavior• The unwritten and/or unspoken rules people follow to

execute tasks and interact

…the way things are done around here

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Ownership Culture

• Interacts with environment — Not “one size fits all”

• Multidimensional— Cannot be “installed”

• Simply put: Employees feel and act like owners

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Ownership Culture

“ “ I am proud to be an employee-owner of XYZ.”I am proud to be an employee-owner of XYZ.”

““It would take a lot to get me to leave XYZ.”It would take a lot to get me to leave XYZ.”

““I look for ways to improve XYZ’s financial results.”I look for ways to improve XYZ’s financial results.”

““I tell others outside XYZ the greatest things about working here.”I tell others outside XYZ the greatest things about working here.”

““I consider XYZ business goals in my daily work.”I consider XYZ business goals in my daily work.”

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Ownership Culture

Ownership• Financial

stake

Engaged Ownership

Engagement• Loyalty• Works hard• Ambassador

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““Employee-owners see things Employee-owners see things differently, they take appropriate differently, they take appropriate risks, they do what it takes to risks, they do what it takes to make the business grow, they are make the business grow, they are not satisfied with being average.”not satisfied with being average.”

CEO of CEO of Fortune 500Fortune 500 spin-off spin-off

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Creating an Ownership Culture

Shared Investment

=

Why should I care?

What should I know?

What should I do?

Information Influence

Ownership Culture

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Shared Investment

• Answers the question—“Why should I care?”• Critical first step: Determine plan objectives

— How will the Company measure the success of the ownership program?

• Need to determine ownership levels— What must employees “own”?— How should ownership affect the relationship with

employees?— Should ownership goals vary among groups of

employees?

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Shared Investment Analysis—ExampleSalary

$100,000+ Total

$19,999 $39,999 $79,999 $99,9992,192 7,801 1,207 631 224 191 12,246

5% 4% 12% 25% 30% 39% 7%Unit B 1% 5% 21% 34% 41% 34% 8%

0% 0% 2% 24% 83% 245% 7%6% 8% 35% 83% 154% 318% 22%

1,295 2,310 568 180 50 33 4,4360% 5% 11% 16% 21% 21% 5%

Unit D 1% 9% 27% 38% 39% 42% 11%0% 0% 4% 36% 130% 326% 6%2% 14% 42% 90% 190% 388% 22%810 471 99 39 21 11 1,4512% 2% 5% 3% 26% 19% 2%

Unit C 2% 6% 21% 21% 34% 40% 6%0% 0% 1% 24% 78% 500% 6%3% 8% 27% 47% 138% 559% 14%

7 35 29 10 12 11 1047% 6% 14% 22% 18% 53% 16%

International 16% 8% 19% 34% 34% 23% 19%0% 1% 18% 62% 58% 216% 41%

23% 15% 51% 117% 110% 292% 76%74 360 238 47 21 15 755

0% 1% 1% 1% 1% 10% 1%Unit A 0% 1% 2% 3% 2% 6% 2%

0% 0% 1% 8% 6% 30% 2%1% 2% 4% 13% 9% 46% 4%

4,378 10,977 2,141 907 328 261 18,9923% 4% 10% 21% 26% 35% 6%

Total 1% 6% 21% 33% 37% 33% 9%0% 0% 2% 26% 84% 252% 6%4% 9% 33% 79% 147% 320% 21%

Business

LegendTotal Stock Ownership as a % of Pay

Count Under 10%% Pay in ESPP & 401(k) 10% – 19%

% Pay in ESOP 20% – 29%% Pay in Options 30% – 39%

% Pay Total Ownership 40% – 49%50%+

$0 $20,000 $40,000 $60,000 $80,000 to to to to to

$19,999 $39,999 $59,999 $79,999 $99,999

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Shared Investment

“Our objectives were to focus on profitability, productivity, and encouraging employees to think like owners. We wanted people to hold the shares. We had a full position of ownership (buy all, partial ownership, cashless with the gain used to purchase shares), and then the cash out (just get the money). We wanted to focus around ownership.”

“The objectives were around the anniversary celebration and creating shareholder value.”

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Information

• Answers the question—“What do I need to know?”• Critical first step: Define and clarify performance measures

— Line of sight— Alignment with business direction

• Education should be tailored for employee population• Communication must be ongoing

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““Stock ownership doesn’t work Stock ownership doesn’t work by itself. Workers need both by itself. Workers need both ownership and a feeling that ownership and a feeling that they are making a contribution.”they are making a contribution.”

Lawrence BossidyLawrence BossidyCEO of Honeywell InternationalCEO of Honeywell International

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Influence

• Answers the question—“What do I need to do?”• Critical first step: Define ownership behavior

— Brings clarity to culture and purpose — Defines business information to be shared— Guides leadership training

• Must examine alignment with people systems— Performance management— Leadership training— Communication

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Influence

“In some countries, there were small meetings of managers with their groups. They were trying to get beyond the mechanics of the grant to what do employees need to do to affect the company.”

“We encouraged department managers to have meetings with employees about how they as individuals or as a unit demonstrate passionate ownership behavior.”

“There is a big leap between what they have their hand on and how they can help the business.”

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Contributors and Barriers to an Ownership Culture1

1 Based on 1998 research results in partnership with Kellogg Graduate School of Management

Top Contributors• Commitment to the organization • Sharing business information • Support from management

Top Barriers• Concern for individual financial security• Lack of shared business information• Inadequate understanding of the organization

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““Giving your people the Giving your people the knowledge, the abilities, and knowledge, the abilities, and the permission to do what they the permission to do what they do best—and take it to the do best—and take it to the heights of ownership—brings heights of ownership—brings more success to a company more success to a company than anything else I’ve found.”than anything else I’ve found.”

Michael DellMichael DellCEO of Dell CorporationCEO of Dell Corporation

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1 Based on 1998 research results in partnership with Kellogg Graduate School of Management

Effective Ownership

Research1 and experience indicate that ownership initiatives • CAN have a significant impact on business• IF three dimensions of the dynamic work together

OwnershipCulture

Promotes“Engaged

Ownership”

Leads To Enhanced Company

Performance

Information

Shar

edIn

vest

men

t

Influence

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Quantitative Analysis

• Examined the financial performance of 382 companies that adopted Employee Stock Ownership Plans (“ESOPs”)

• Reviewed two years prior to ESOP adoption and four years following adoption

• Compared pre- and post-adoption industry-adjusted ROA levels

• Examined post-adoption incremental TSR relative to benchmark comparison companies

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Qualitative Analysis

• Sent written surveys to:— Senior management of the ESOP study companies— Additional 230 companies with broad-based employee

ownership programs

• Examined self-reported levels of:— Company information sharing— Employee influence and participation programs— Observed ownership behaviors

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+2.7 Percentage Points each year

Post-AdoptionPeriod

(4 years)

ROA of Non-ESOPCompanies

ROA of ESOP

Companies1 (Industry Adjusted)

Quantitative Research Results—ROA

Industry Adjusted Relative ROA (Annual)

1 Adjusted to normalize effect of superior pre-ESOP performance

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Year 1 Year 2 Year 3 Year 4

19.2% Comparator Group TSR

26.1% ESOP Companies TSR

6.9 Percentage Points

+1.6%

Quantitative Research Results—TSR

Cumulative 4-Year TSR

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No ResponseNo / Negative

Impact

Positive / Significant

Impact of Ownership on Business Results:

82%

Qualitative Research Results

• Don’t know if the ESOP caused improved financial results• Companies believe the ownership program made a

difference

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Employees Use Information to Impact Business Results: Employees Use Information to Impact Business Results:

77%

23%

Agree Disagree

FinancialResults

Customer Expectations

Business UnitStrategies

CorporateStrategies

75%

25%

Agree Disagree

65%

35%

Agree Disagree

40%

60%

Agree Disagree


Significant correlation between companies indicating positive business impact and:• Greater levels of employee access to information• Use by employees of such information

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Training • There is also a correlation between employee training and

use of information• The most frequently cited training areas are:

— Customer expectations — Business unit strategies— Financial results

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Ownership behaviors • Only 18% of those responding indicate that employees

other than management and supervisory groups “act like owners most of the time”

• Only 2% indicate that union employees do so• The most frequently cited ownership behaviors are

“speaking with pride” and “acting as an ambassador”

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Overall Research Results

Overall we learned that:• Sample ESOP companies out-performed their peers over

the study period• Survey respondents believe:

— The ownership program had a significant impact.— They have done a good job of sharing information and

training employees to use that information in positive ways

• However, most survey respondents do not think broad groups of employees act like owners most of the time

Global Influences on Global Influences on Ownership CultureOwnership Culture

EmployeesEmployeesUnderstandingUnderstanding

ReadinessReadinessEngagementEngagement

AwarenessAwarenessOrganization Organization LeadershipLeadership

StrategiesStrategies

Systems and Systems and ProcessesProcesses

ValuesValuesStructuresStructures

CultureCulture

MarketsMarkets

Products and Products and ServicesServices

CustomersCustomers InvestorsInvestors

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Global Implications on Ownership

• Design and administration (Session 1A)— Local tax laws — Varying comfort with technology

• Communication (Session 4)— Message will be filtered through lens of local culture— Translation is not enough — Need support of global leadership

…need to assess Plan from local perspective

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“We worked with our CEO, CFO, all senior leadership globally, and the Board of Directors to get buy-in that this was a direction we wanted to take.”

“We had a place in the presentations for the senior leaders to put their thoughts in their own words—what the grant meant at the site.”

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Dimensions of Culture

• Six dimensions of culture1 — People perspective— Performance orientation— Identity perspective— Openness perspective— Control orientation— Flexibility

• Create overall picture— Local program coordinators can help

1 Adapted from research on cultural differences conducted by Geert Hofstede

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“We had a regional person. These people handled everything from soup to nuts in their locations. We were able to pinpoint a person to go to for support. We engaged these folks up front. I want to stress ‘engagement.’ We utilized them, but we had to engage them. The success of the program was so largely dependent on how they handled things in their location.”

“We assigned a site liaison in every country that became our stock option liaison. They are still intact.”

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“We passed the translated brochure to the local country person. We wanted to know that the translation is correct and okay form a legal perspective, and that it makes sense to a compensation person.”

“All countries were supplied an English base version of the communication for translation and handled the translation on their own.”

“The site liaison determined what was best for their location. That worked well.”

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Dimensions of Culture—People Perspective

Person-Oriented

Job- Oriented

A focus is not only on what people deliver, but also on each person as an individual

Getting the job done.

Concern for people is based primarily on what they

deliver for the organization

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Dimensions of Culture—Performance Orientation

Process- Oriented

Results- Oriented

How things are done

A focus on the processes and activities that lead to high performance

What is accomplished

The result is more important than the

procedure

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Dimensions of Culture—Identity Perspective

Company- Oriented

Professional- Oriented

Employees identify primarily with their organization

Employees identify primarily with their

profession

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Dimensions of Culture—Openness Perspective

Open System

Closed System

Diversity of people, viewpoints and communication styles are encouraged

There is a defined organizational type of

person, viewpoint, and communication style

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Dimensions of Culture—Control Orientation

Self-Driven

System-Driven

Individuals, teams, and smaller organizational units take accountability for their own systems and procedures

Systems and procedures are developed, managed

and maintained by the organization

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Pragmatic Normative

Dimensions of Culture—Flexibility

Standards and procedures are flexibly applied to meet customer expectations

A focus on adhering to well-established standards

and procedures when dealing with external

customers

Merck—A Case StudyMerck—A Case Study

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Merck—A Case Study

• Two Global Stock Option Plans— Centennial Grant (1991)— Ownership Grant (1993)

• 37,000 employees in 67 countries• 5-year cliff vesting (Fall 1996 and Fall 1998)• Generated over $1 billion in value

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• Objectives— Promote ownership (literal and emotional)— Encourage long-term thinking— Link long-term employment and rewards

• Communications— Flyer at time of grant— Brochure at time of vesting

–7 languages–Covered value of award and exercise process–54 pages

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Follow-up analysis to measure the impact of stock options on employees• Focus groups: 6 countries, 164 participants• Survey: 7 languages, 24 countries

— Distributed to 7,154 employees— 41% response rate

• Assessed whether stock options:— Influenced employee behaviors— Supported business goals— Engaged employees

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Strongly agree/agree

Somewhat agree

68% 89%21%

80% 91%11%

71% 88%17%

Merck—Results

How have stock options influenced employees?

Stock options cause employees to:

• Feel they are sharing in Merck’s success

• Make an effort to stay informed about Merck’s business

• Be more interested in Merck’s financial results

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1Current satisfaction shown in parentheses

I feel I have a strong financial stake in the

success of Merck (57%)

I have a good understanding of how Merck’s stock value is

linked to Merck’s performance

(63%)

What I do will make an important impact on how successful Merck will be

(55%)

Merck—Results

Do stock options encourage employee ownership: overall results1

Influence

Information

Sha

red

Inve

stm

ent

I feel like an owner of Merck

(45%)


(45%)

49


(47%)


(47%)





(61%)

Influence


(52%)

Information

Sha

red

Inve

stm

ent

Merck—Results

Ownership Model: North America1


50


(54%)


(54%)





(66%)

Influence


(86%)

Information

Sha

red

Inve

stm

ent

Merck—Results

Ownership Model: Central/South America1


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Merck—Summary of Results

StrongFinancial

Stake

Understand StockPrice Link to

CompanyPerformance

Can Make an Impacton Company Success

Feel Like anOwner

North America 60% 61% 52% 47%

Western Europe 50% 69% 52% 39%

Central/South America 65% 66% 86% 54%

Middle East/ Africa 54% 64% 71% 44%

Asia/Pacific 38% 42% 53% 35%

Overall Results 57% 63% 55% 45%

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Merck—Lessons Learned

“Based on the survey and focus groups, there was an increased awareness of performance of the company. We learned from the survey that most employees followed the price of the stock more closely than they did before. We learned that stock options encouraged a sense of ownership, but employees did not feel like owners per se.”

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Merck—Lessons Learned

“There was not a lot of communication between grant and the time we were ready to vest. Looking back, there could have been an annual brochure or statement to keep it top of mind for employees.”

“We made the mistake that we did not spend those five years communicating. Some additional communication would have been good.”

“Start communicating early…well before the vesting so people know they don’t need to exercise right away.”

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Summary

• Engaged ownership is psychological as well as financial• Ownership culture is multidimensional

— Shared Investment— Information— Influence

• Practical considerations for global plans— Local culture will impact idea of ownership — Other forces outside of direct company control may also

impact the ownership culture

• Information and communication are critical for organizations with mostly non-highly skilled employees

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Keys to Success

• Get leadership support— Alignment with business strategy— Championed by line heads— Implemented by HR and legal

• Create line of sight— Define ownership behaviors— Link to specific strategies

• Measure impact— What are indications of success?

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Keys to Success

• Commit to ongoing communication— Highlights brochure— Employee/Manager/HR meetings— Newsletters, email, Intranet articles, news releases— Promotional material

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Keys to Success

Techniques proven effective• Using a centralized communication approach tailored to

local needs• Focusing on what each employee can do to improve

business results• Providing business education• Avoiding translation pitfalls• Training meeting leaders

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What’s Ahead

“Second Generation” programs will build on (not necessarily replace) earlier efforts• More fully developed infrastructure• Deeper appreciation of cultural issues• More emphasis on measurable impact on attitudes,

behaviors and financial results• Multiple vehicles—some focused on global linkage, and

some that emphasize local appropriateness and impact• Greater comfort with the notion that a global “program”

can be composed of a variety of locally appropriate “plans”

workplace culture and global equity session 5b: issues for companies with mostly non-highly skilled...

Documents

ownership goals

ownership program

ownership levels

stock purchase plan

spinoff slide

profit sharing plan

stock option plan spp

workplace culture