Poking the Fairness Dragon

by Chris Budd….

During one of our Q&A sessions, EBC associate Campbell McDonald referred to something he called the ‘Fairness Dragon’.

Most individuals have a keen personal sense of wanting to be treated fairly, but often lack any meaningful points of comparison (for instance, because they don’t know what other people earn). Consequently, the issue of ‘fairness’ can lie dormant.

The process of becoming employee owned tends to draw attention within the business to people’s sense of fairness. There are a number of points in the process where the ‘Fairness Dragon’ gets poked and woken up – and it may not be in a hurry to go back to sleep again!

The Sale Price

The first poke comes when the sale of the business to an EOT is announced to all employees, and the sale price is made public. That price will surprise most employees –many will have no idea of that value.

At this point some employees may say to themselves “Hang on, haven’t we been working hard to help create this value?” They will also see that they are unlikely to share in the proceeds of the sale.

It is critical therefore that the owner has an honest narrative ready for employees so they understand the personal financial risk taken on around starting and growing the business, and that the sale of the business is a reward for taking on that risk. In our experience, when this is properly explained, employees tend to understand this risk/reward relationship.

Incidentally, this fits neatly into a narrative that goes on to explain they now have the opportunity to become part owners in the business and share in future reward in a way that requires them to take no financial risk!

Now The Dragon Is Awake…

Now the ‘fairness dragon’ has been woken up, some employees may look again at their current earnings. They may seek reassurance that salaries are fair (both against industry norms, and between one another), and may want to understand the process and criteria for deciding on pay increases and performance-related bonus.

In large companies and the public sector, salaries are set by pay grades, so everyone knows what their peers earn. In small businesses, however, this is rarely the case (I conducted some research into companies where all employees know – and even sometimes set – each other’s salaries).

And then comes the all important question of how the trustees will distribute the profit among the employees.

The distribution must be ‘broadly equitable’ – meaning a formula can be constructed incorporating salary, service, and hours worked (but not performance criteria). This will give rise to discussions about whether new employees should receive the same share as long serving employees. And if salary is used in the formula, we go back full circle to whether salaries levels are fair, as it will impact on the bonus payments.

What Can Be Done?

So how can we avoid poking the Fairness Dragon?

In short, you can’t. What you can do, however, is prepare so that the impact is not damaging. And this means being well prepared before you share any EOT plans with the employees, and ensuring that the company has clear processes and principles in place.

Attitudes to fairness is a perception of reality. If there is clarity among everyone with a team of what their role is, who is making what decisions and where (something we refer to, as the ‘pathways of control in the Eternal Business Programme), then there is less likely to be a perception of unfairness.

The announcement is also going to be key. We have seen owner’s announcement speeches which are all about why the owner has found their ideal exit – and not about why the EOT is great for the employees.

The trustees also have an extremely important role to play here. The communication around the formula for profit distribution, for example – will the employees be surveyed, how will a consensus be found?

Some longer-standing employees may feel that employees who have only just joined the company should not be getting the same amount as those who have been there for a long time. This could therefore be factored in, perhaps by applying a factor relating to length of service, or a banding for years worked.

How this formula is arrived at and how the trustees survey and engage the employees is key to this perception of fairness.

With regards to salaries, not many employees will be comfortable sharing salary levels with their peers, but perhaps a remuneration committee could be the start of this process of ensuring fairness of earnings between similar roles.

As with so many other things relating to employee ownership, such issues do not need to arise, if they are planned for and prepared for.

This is what we do at the Eternal Business Consultancy, and if we can help you, please get in touch.