DeSimone emphasized something we have been arguing for decades, namely the notion that the simple fact of people owning stock in their company will “lead them to work harder, make more suggestions for improving performance, be more likely to stay, put pressure on other employees to make more effort, and work more cooperatively with colleagues” is not supported by reality and research. Ownership on its own makes only a small performance difference. Real gains, as we discuss in our new book, Beyond Engagement: How to Make Your Company an Idea Factory, come from setting up structured ways for employees to identify more problems, contribute new ideas, and implement new solutions on their own. Most employees don’t really focus day to day on ownership. They have no line of sight between what they do and stock prices. That means companies need to share information about overall company performance as well as work-level performance metrics. There are structured opportunities to do all that through teams, ad hoc groups, up-down strategic planning, cross-functional groups, self-managing teams, and more.
A key to making this process work is being able to link valuation to what people do at work. Some employees will get the linkage easily, but most will need training, often through interactive games and examples.
Companies should have an annual meeting (live or now virtually) where the new valuation is disclosed. Start with a presentation of the year’s overall financials, challenges, milestones, and opportunities, showing numbers versus budget and the prior year. Talk a little about what has happened in general in the stock market. A good next step is to have employees talk in groups (which could be online subgroups) about what they expect the new number to be and why. They can then submit their guesses as to value, with a prize to the winner.
Either the valuation expert or the CFO should then walk through valuation approaches. Your appraisal will often be based in part or even entirely on discounted future cash flow. The idea here is simpler than it appears. The question is how much would you as an investor pay to have the right to a certain amount of money earned over a defined number of years. The company provides a forecast based on projecting its prior years’ numbers into the future or, if these are not expected to be indicative, what its future forecast shows. The bigger the risk that these numbers may not be met, the less the investor pays. There is a lot of detail on weighted average cost of value, discount rates, residual value, etc., but you don’t need to discuss all that. The simple takeaway for employees is that the faster future earnings grow and the more likely you are to achieve them, the more an investor pays. The bottom line is that investors pay a multiple of earnings. You can tell your employees what that is, so that every new dollar in earnings (or more technically EBITDA) is worth x times that in stock value.
The second method used is to compare your company to guideline comparable companies and see how much investors paid to get their earnings. This is just another way to figure out the multiple, so the details of this method are not important for this purpose.
The results of this calculation with a multiple are finally adjusted for assets and debt. That produces a value for the whole company if it were sold, but the per share value will not necessarily be the enterprise value divided by the number of shares. You should walk through why that is.
Your last task is to help employees understand why the multiples used are in part a reflection of what is going on in the market. If people are reluctant to buy stock, all stock in all companies will have less value than if buyers were more eager. The rationale is the same as paying less for the same house used as a rental generating the same annual rent in a market where people are not buying houses in general. The income is the same; the value is less.
Now you are ready to show linkages. Show some examples (hopefully you have some!) of employee ideas over the year and how much they saved or how much new profit they generated. Now show what each of those meant for added share value. Similarly, show how the reverse happens with avoidable losses, like customer returns. This is a good time to get employees in groups (or have them do it virtually) to toss around ideas, with each group then contributing one idea to be considered for the year.
On an ongoing basis, share key performance indicators in regular small group meetings (teams, departments, etc.). Have a more general quarterly business review. Think about having teams set targets for improvement, meet to generate ways to meet them, track performance, and share the results. As DeSimone says, this should be specific, measurable, attainable, realistic, and timely. When you do have wins, celebrate—but also make sure you explain just how that team accomplished what they did.