How to Get a Piece of the Action

By: Eric MatsonTue Dec 18, 2007 at 5:41 PM

What's the difference between a star athlete and you? These days, less and less. Here's how to negotiate for the deal you deserve. (We'll take our 10%.)

When Options Aren't an Option

Negotiating for equity is the most direct way to get a piece of the action. But options simply aren't an option for everyone. Most professional-services firms are still privately held companies. Lots of talented people work for business units and small teams inside big companies -- diversified organizations whose market value rises and falls based on factors beyond their control.

Is it possible to get a piece of the action in those situations? Absolutely. The good news about the spread of startup fever is that it creates a favorable negotiating atmosphere for everyone -- even for people who aren't in a position to pursue the holy grail of stock options. All it takes is some tough-minded negotiating and a few concrete models from which to fashion creative proposals.

Sun Microsystems is experimenting with one such model. Once a high-flying startup, the workstation giant now has annual revenues of more than $7 billion and about 17,000 employees. Its core strategic challenge, says Ken Alvares, vice president for human resources, is retaining its top performers amid Silicon Valley's IPO frenzy. "This is the most competitive industry in the world right now -- for products and for people," he argues. "All our best people get calls from startups. They say, 'We'll give you a million options, let's rock and roll.' That's what we're up against."

For a while, Sun simply fought fire with fire. It offered stock-option grants to engineers being wooed by stock-happy startups. Over time, though, Alvares and his colleagues realized that one-upping the competition was a losing proposition. "You've got to make people want to stay before someone comes in with a competing offer," Alvares says. "Most people psychologically disengage [after a bidding war]. Even if they accept our counteroffer, they usually leave within two years."

Sun's new model approximates the startup experience inside what is now a giant corporation. Sun identifies projects that it considers critical to its future. It then creates "shares" in those projects -- complete with documents resembling stock certificates -- and distributes them to engineers working on relevant project teams. At the end of a fixed time period -- usually three to five years -- Sun will turn these shares into cash based on the profits the projects generate.

Alvares believes this program creates many of the right incentives for people who want a piece of the action. It puts a premium on timely performance. The "payout clock" starts ticking when a project begins, which creates pressures to deliver the product on time. After all, the longer a product is on the market (rather than in the lab), the greater the profits it generates -- and the more valuable each engineer's shares. The program also matches rewards to results. If a team of engineers delivers a great product, the members will win big even if the company as a whole has a disappointing year.

"Engineers who participate in this program can end up making a lot of money," Alvares declares. "But only if they stick around. If they leave, they lose. That's a not-too-subtle reason for doing it. We want our people to feel that they can stay here."

Saltz Shamis & Goldfarb, a midsize accounting firm in Solon, Ohio, has developed a different model to give its people a piece of the action. Unlike the Thomas Group, Saltz Shamis has no plans to go public. So the firm has devised "phantom shares" to simulate the behavior of publicly traded stock. Saltz Shamis unveiled the program in January 1995. To date, 30 of its 45 eligible CPAs have chosen to participate. Their combined stake now represents 1.5% of the firm's total capital, and Saltz Shamis is willing to allow their overall stake to reach 10%.

The phantom-stock program requires that people put themselves at risk -- although the risks are minimal. Participants must spend at least $3,000 of their own money to make an initial lump-sum investment. They can then make additional investments, in units of $1,000, every January. Saltz Shamis guarantees an annual interest payment of 8% on the funds its people invest. The principal value of the shares rises or falls based on a tangible performance metric: the firm's annual cash receipts. So far the investment in phantom shares has paid off. The shares appreciated by 33% in 1995, and they're expected to grow by 40% in 1996.

Why did Saltz Shamis adopt its innovative program? "Because of the changing nature of the workforce," replies Jay Nisberg, a management consultant based in Ridgefield, Connecticut who advised the company on the phantom-share plan. "Everyone is looking for high-potential people. But they're the hardest people in the world to reward and retain. This plan is absolutely cutting-edge. It's designed to motivate these people."