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Awards are a ‘mutual promise to work together’ with shared purpose
Greek yogurt maker Chobani, based in New Berlin, N.Y., announced it will be giving all of its 2,000 full-time workers equity awards that could be worth up to 10 percent of the privately held company's future value, if or when the firm becomes public or is sold. The scope of the move drew attention, as broad-based equity grants are more typically made by startups and tech firms than by traditional companies.
Each current full-time employee will be given “Chobani Shares”—award units based on the worker’s tenure and role at the company. These awards could convert to cash or tradable shares in the event of an initial public offering (IPO) or a sale. The value of the awards will depend on company performance, and the awards could potentially be worth nothing if the company doesn’t meet its performance objectives.
But The New York Times estimated the average award could be worth $150,000 based on a $3 billion valuation of the company. Some awards, for those employees with the longest tenure, could top $1 million, according to the paper.
“This isn't a gift. It’s a mutual promise to work together with a shared purpose and responsibility. To continue to create something special and of lasting value,” Hamdi Ulukaya, Chobani's CEO, said in a letter to employees. The Chobani shares come from the personal holdings of Ulukaya, a Turkish immigrant who founded the company in 2007.
Although there is nothing preventing privately held companies from awarding nontradable equity shares, often “participants are not attracted to a device that is restricted, nonliquid and has a capricious value, while most owners are not interested in creating minority shareholders,” Paul R. Dorf, chairman and founder of the New Jersey-based consultancy Compensation Resources Inc., previously told SHRM Online.
However, Chobani employees can be reasonably confident of seeing value from the equity grants, since a future IPO or sale is likely, said Malak Kazan, vice president for special projects at ERI Economic Research Institute in Orange County, Calif. “The ownership of the firm—closely held, controlled, private equity—contributes to the likelihood of one of the triggering events occurring and directly impacts motivation,” she noted.
“In reviewing the history of Chobani, it appears to have achieve impressive business results despite some setbacks, with what seems to be a highly effective workforce,” Kazan told SHRM Online. “Giving the equity at this time—and communicating the business rationale—will help to keep the success going, raising performance and related engagement to new levels. Ownership can be very compelling.”
“It definitely creates an ownership culture,” Bruce Elliott, manager of compensation and benefits for the Society of Human Resource Management, told The Washington Post. “It focuses not only management but employees on bottom line and top-line figures.”
If employees end up holding substantial equity stakes, it could lead to more natural alliances among investors, pre-empt unionization efforts, and foster the connection between workers and management, Elliott noted.
Taking a Cue from Tech Firms
Technology companies are more likely than traditional manufacturers to award stock grants broadly among the workforce. Last October, for instance, Cupertino, Calif.-based Apple announced it was opening up restricted stock awards to all employees. In a memo e-mailed to employees, CEO Tim Cook said the company’s program would award restricted stock, or shares that typically vest over a certain period of time, not just to executives and product engineers but to hourly paid workers—including Apple’s retail employees.
Jack Dorsey, chief executive and co-founder of San Francisco-based Twitter, also announced last October he was giving a third of his stock in the company—about 1 percent—to an employee equity pool. The move, estimated to be worth $197 million, was to “reinvest directly in our people,” Dorsey said in a tweet.
“It gets everybody facing in the same direction,” said Eileen Adler, chief HR officer at PeopleFluent, a business software provider based near Boston. “People are going to start to make decisions as if they are owners, as opposed to just hourly employees or as if this is just a job. They'll behave differently.”
The National Center for Employee Ownership reported that, as of 2013, about 20 of the largest 900 S&P companies gave restricted stock to most or all employees.
“Using the right equity instrument is important,” said Kazan. “Most global companies with broad-based plans will choose restricted stock units (RSUs) as the preferred instrument to deliver equity awards, because when employees receive an RSU grant a taxable event will likely not be triggered until the award vests. This avoids an unplanned tax event that otherwise could pose short-term financial distress for employees in lower salary ranges and diminish the intended purpose of the equity plan—to align employee interests with the long-term success of the company.”
To Be Determined
Chobani has only released limited information about its award grants, so many specifics remain unknown.
“Generally, for phantom equity or stock awards, the agreement will have vesting schedules that stipulate what an employee can do with the vested equity while still employed, upon leaving the firm, and in the event of disability and death,” Kazan noted. “For phantom shares, the company will create its own ‘internal market’ to facilitate the cashing out process and help the employees realize the financial benefit.”
Kazan pointed out that last year San Francisco-based Pinterest, known for its photo-sharing app, announced it will allow employees (with at least two years of tenure) to retain the right to exercise their stock options up to seven years after they leave the company. But “I can't say this is common,” she said.
What Chobani’s Equity Transfer Is Not
While undeniably a windfall for current employees, the share awards at Chobani constitute neither an employee stock purchase plan (ESPP), through which employees are entitled to purchase additional company shares at a discount on an ongoing basis, nor an employee stock ownership plan (ESOP), which allows employees to own, control and share in the profits of a company through a trust. Instead, the equity transfer is akin to a practice that’s “relatively common for tech startups [that] offer stock to employees,” noted Sean Leslie, a senior content strategist at PayScale, a Seattle-based compensation software company. The idea is to provide “an incentive of a potential big payoff for the long hours and low pay that's required as companies get up and running.”
Chobani isn’t a small startup, but it’s still a young and growing company. As to whether it will eventually provide its employees, including future hires, with a formal plan to acquire an equity stake in the firm, time will tell.
Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.
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