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How to build a real partner team with equity incentives

  ”Get employees to think like owners.”
  ”Make the team all partners in the business.”
  This is the goal that many enterprises and entrepreneurs want to achieve, so they find the tool of equity incentive, hoping to give equity in exchange for employees’ “boss thinking” or “partner thinking”.
  However, in practice, equity incentive mostly stays at the level of economic benefits, but does not go deep into the psychological perception of the incentive recipients, and most of the incentivized employees and managers do not really feel that they have “become partners”.
Global executives aspire to “partner” status

  In the latest Goldman Sachs 2020 partner selection, 60 senior employees became new partners, the fewest since the IPO in 1999 and 24 fewer than the 84 in 2016. According to Goldman Sachs, “this underscores the nobility of the partnership position and inspires more ambitious employees to aspire to this goal.
  The partnership system, which has been in place for more than 100 years, is an important part of Goldman Sachs’ lauded management system, and was retained after the company went public in 1999, making it an attractive option for Goldman Sachs’ elite.
  Of the more than 30,000 Goldman Sachs employees worldwide, only about 500 are able to become partners, and these partners are the elite of the elite. In terms of salary, becoming a partner means an increase in base salary, a share in the firm’s bonus pool, and access to specific investment opportunities granted by the firm.
  But financial rewards are not the primary source of incentive for Goldman partners. Prior to the IPO, all of the firm’s assets were held by the partners, and while 60% of the shares were still in the hands of the partner team at the time of the IPO, in recent years the partners’ share has fallen to less than 5%. The name “partner” has not been devalued among Goldman Sachs’ elite managers – it is the status of “partner” that is attractive to the best talent in investment banking.
  Since going public, Goldman Sachs has maintained the number of partners at between 1.5% and 1.9% of the total number of employees, a status that is doubly valued because of its status in the investment industry and the scarcity of partners. The Goldman Sachs partner team is renewed every two years at a rate of 1/4 or 1/3. The process is a rigorous and rigorous one, in which “the ability to build a prominent business that adds value to the Group and demonstrates Goldman Sachs’ business principles and guidelines” is used as a criterion for selection, and is “cross-screened” by different departments. The final selection of new partners is made through a process of “cross-screening” and interviews with current partners and staff.
  After the final list is determined, on a specific date, the Goldman Sachs CEO personally calls the new partner. This call becomes a ritual, and being able to receive a call from the CEO on this day becomes the most anticipated event for those prospective partners.
  Becoming a partner entails participation in partner meetings, various committees, and the opportunity to participate in campus recruiting activities and attend specific meetings and events. Being able to attend events that you would not otherwise have the opportunity to attend becomes a symbol of special status.
  The Goldman Sachs partnership mechanism reflects these characteristics: first, the strict ratio control makes partner status a scarce resource, reflecting the elitist orientation; second, partners go through a strict selection process, both the criteria and the selection process, to ensure that partners are the most elite group of people within Goldman Sachs; third, becoming a partner is not only a tangible benefit, but also a symbol of status and honor; fourth, partner incentives will involve equity, but equity is not the main element of partner incentives; fifth, the partner team can have substantial influence on the firm’s operation through partner meetings, etc.
  Goldman Sachs partners have a very low percentage of equity in the firm, but the partner team is still the core force that drives Goldman Sachs’ steady development, and the partners see Goldman Sachs as “our Goldman Sachs”, not because of the amount of equity they hold, but because of their status as “partners”.
“Sense of identity” is the lever of incentive effect

  While entrepreneurs are keen to discuss the “money sharing rules” of equity incentives, they also need to return to the essence of incentives. In addition to the distribution of material benefits, the more important thing is to give an identity, and to make the incentive recipients perceive this identity. Compared with material incentive, the incentive effect brought by identity perception and identity is more obvious – when the company treats employees as partners, employees are likely to treat themselves as partners.
  Whether it is giving equity or dividend or appreciation rights, it is formally giving some kind of ownership to the incentive recipients. However, the actual ownership is not the same as the perceived ownership, and some scholars call the perceived ownership “psychological ownership”. According to Pierce, a management scholar, psychological ownership is “a state of mind in which individuals feel that the target or part of the target is ‘theirs’ and is centered on a sense of ownership and mindfulness of the target. ” – employees have an “entrepreneurial spirit.
  When core team members perceive psychological ownership, as Goldman Sachs partners do, this “perception” is having a motivational effect. This “sense of identity” becomes a lever for equity incentives, leveraging stronger internal psychological resources. This view is supported by empirical studies, with Pierce et al. suggesting that employees with psychological ownership exhibit more extra-duty behaviors, and Mayhew et al. suggesting that employees with higher psychological ownership have higher job satisfaction. Li-Ling Li, a domestic scholar, argued that employee psychological ownership is significantly related to work engagement and organizational identity. Management scholar Fang Yuan confirmed that employees with psychological ownership have higher job performance. At the same time, psychological ownership is also related to employees’ propensity to leave, and Huang Haiyan et al. used empirical research to prove that perceived psychological ownership can reduce the propensity to leave.
  Given the importance of psychological ownership – or “sense of identity” – how can key employees experience it as an incentive target in equity incentives? In our opinion, there are three main aspects.
  Firstly, the right to be informed of the company’s key management issues and strategic direction can give the incentive targets psychological ownership and form the incentive effect of “sense of identity”.
  Secondly, through the ritual activities, the incentive recipients can get the identity belonging to the company, so that they can naturally feel the identity of “their own people” and get the psychological ownership, forming the incentive effect of “sense of identity”.
  Again, the opportunity to participate in the company’s management or decision-making on important matters can give the incentive recipients psychological ownership and form the incentive effect of “sense of identity”.
  The biggest difference between equity incentive and other incentives is that it can meet the social recognition and self-fulfillment needs of employees, and this satisfaction mainly comes from the identity giving. Compared with the ordinary employees, the targets of equity incentive are more core managers or key positions of talents, and such groups have a stronger demand for identity and self-achievement, and their incentive effect is more prominent.
  Many companies follow the benchmark companies and use the name of “partner” to do the equity incentive, but partner is more of an identity than an economic reward. Therefore, in addition to material incentives, to give excellent talents “partner” status, the enterprise can find the real partner, only then can create a real partner team.
Four steps to build a partner team

  North Road is a software company in the vertical field, most of the employees are technical talents, the company staff size is small, but the profitability and development trend are good. The company’s key talent is paid above the industry average, but it is still not immune to the “poaching” of sought-after talent.
  When we approached the founding team of North Road, they focused all their consideration on the two issues of how much equity they could offer and how large a group they could cover. The research found that the salary level of North Road was not low, and the key talents were veterans of the industry, so the primary consideration for them to leave or not was not the financial reward, but the realization of self-worth and identity.

  After communicating with the founding team, we reached an agreement on the concept – in addition to designing the equity distribution plan, it is more important to design the four-step identity incentive method for the partner team to build.
  Step 1: Clarify the model of small amount, high frequency and perpetuity, and strengthen the strength with time.
  The key to the so-called small, high-frequency and perpetual is to do equity incentive and partner incentive with long-term vision and thinking, with a small single amount but continuous incentive and a clear entry and exit mechanism. This concept not only stays in the words, but also in the method of program design, and more importantly, it is preached and communicated with all key talents so that all parties can look at the current and future partner incentives with a long-term thinking.
  When the identity is enriched by time and has a long-lasting perception, this identity is more able to reflect the value, so the clear model of small amount, high frequency and perpetuity itself strengthens the incentive.
  Step 2: Select people precisely and inspire benign “fighting spirit” with high standard.
  When an identity has a high threshold for acquisition, the more it makes potential entrants feel the value, and when the threshold is fairly and strictly enforced, it will stimulate the benign “fighting spirit” of those outstanding talents and make the identity more attractive.
  The equity incentive itself requires a high threshold of entry, and the threshold is further raised by obtaining partner status. For the partners of North Road, the following entry requirements have been set.
  To assist the founding team in the screening of incentive targets, a complete quality model of core qualities (5 items) and leadership qualities (4 items) of North Road was constructed. The quality model serves both as a basis for assessment and as a guide for employee behavior. Each quality of this quality model is clearly defined with five levels of behavioral descriptions to facilitate behavior-based evaluation (table below).

  To ensure an objective and fair evaluation, in addition to the 360-degree assessment of all potential partners, a special talent calibration meeting is conducted to discuss each candidate’s potential strengths and weaknesses and to assess their ability to join the new partner team. In addition to the founding team, the direct and indirect superiors of the evaluated candidates are invited to participate in this process to ensure that the results are fair and objective.
  Step 3: Design the rights and obligations of partners and rules of procedure to show the difference in status
  The more an identity can reflect its different authority or opportunity, the more this identity will make potential entrants feel the value.
  When a partner becomes a manager or other senior person in North Road, they have different rights and obligations than their counterparts who do not have that status.
  In addition to the rights and obligations that fall clearly on paper, more practical details may reflect the difference in status, which in turn enhances the perception of identity.
  At North Road, the elected partners have the opportunity to speak as representatives of the business, an opportunity granted by the board of directors. In addition, North Road is designed to hold special semi-annual partner meetings and allows partners to propose ad hoc partner meetings. Partners have formal channels of deliberation and multiple paths to participate in the firm’s decisions on major matters.
  Step 4: Partner declaration and regular interaction to strengthen the identity of “one’s own”
  The more frequently and clearly the identity mechanism reminds the identity holder of his specific identity, the more the identity will drive the holder to act in a way that matches the identity.
  After finalizing the partner incentive program and the first list of partners at North Road, the partner incentive program is followed by a presentation, a communication, and a formal declaration by all partners, after answering all the detailed questions. This declaration is a public statement of identity and a public commitment.

  North Road’s partner declaration is written by the founder and read to the company’s key talent team after the partners’ approval, which is not only a public commitment to strengthen the identity of “our own people”, but also a cultural attraction to attract the later.
  In addition to the ceremonial reading of the partner declaration, North Road has also set up regular informal “tea parties” for partners to strengthen the identity of “one of us” by communicating in a non-work setting.
Conclusion

  Compared with the allocation of equity that many entrepreneurs and founders strive for, if key talents can be truly granted “partner” status, they are more likely to truly “become the boss” from the inside and handle company affairs with a “psychological ownership They are more likely to “become the boss” from the inside, to handle the company’s affairs with “psychological ownership” and to devote themselves to the company’s business. Most of the time, the effect of equity incentive does not necessarily come from the actual shares granted, as long as the incentive target can perceive the partner status, even if it is a virtual share, the incentive effect will be better than the actual shares – this is the leverage effect of identity incentive. The smaller and more scarce the status incentive covers, the more obvious the leverage effect is, and the more powerful the incentive effect can be felt by the incentive recipients.
  This is the secret of building a real partner team.

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