Employee Stock Incentive Plans- Complications for the Family Business

Owners want non-family business leaders to behave like owners, and so they give them shares.  Trying to align incentives is right, and families certainly want to reward executives when the business does well.  But the family needs to exercise extreme caution when giving shares outside the business-owning family.

Some businesses are family owned, but not run by members of the family. So, how do you make such non-family key employees act like they are owners? Give them skin in the game.

The most common form of “skin” in the game is company stock. Done right, this approach can be a win-win for all parties involved. That said, great caution is due; beware, as described in a recent WealthManagement.com article titled “The Tyranny of Minority Shareholders.”

Structuring your family business for the future is not an easy task. What of value in life is? While each company and family is different, making a key employee a part owner certainly can give them added incentive to run things when the family cannot or will not. Great care must be exercised, however, in implementing such incentive programs for non-family employees, and the advice of an attorney familiar with succession planning for small or family owned business should be sought.

For example, you can create tension between the family owners and the key employee turned minority shareholder. Conflicts can arise should the majority owners (i.e., the family members) take actions in their own self-interests without considering the concerns of the minority owners (i.e., non-family members). In some cases, a minority shareholder can be protected by state and federal laws as in the case discussed in the original article regarding the Empire State Building IPO.  Section 16-10a-1302, Utah Code Annotated, protects Utah shareholders.  When the shareholders dissent from certain corporate actions such as merger, share exchange, and sale or lease of substantially all of the property of the corporation, dissenting shareholders may be entitled to payment of the fair value of shares held by them.  This may limit the ability of the majority owners (i.e. the family members) to dispose of their own interest in the corporation.

Even if you do not own an international landmark, there are many ways you, your family, your non-family executives, and, yes, your business, can find a happy medium. However, it takes time and qualified counsel to structure things correctly.

Reference: WealthManagement.com (June 20, 2013) “The Tyranny of Minority Shareholders”