Q: My best friend is a freelance member of my staff. He has committed six months of his inheritance money into becoming the company's first sales manager. However, he is only a quarter of the way to achieving his target, although he could still achieve the set minimum target.
Since he will probably only achieve the minimum target, I can only promise him a minimum wage plus commission. With regard to his commitment over the past six months, he has stressed that he cannot afford to come on board at the minimum wage, but asked if I would consider giving him shares in the business so he has a vested interest. What are your thoughts?
A: Your concerns and questions are certainly very valid and serious, and they strike at the heart of doing business-making a profit. No matter how large or small the enterprise, revenue cannot be overlooked or minimized.
You have two key issues at stake here-money and friendship. When you combine them in a business setting, you risk losing one or both of these factors. Yet, you also have the potential to increase the return on both. The real question for you is, are you prepared to lose a close friendship and/or company revenues?
You have already decided to go ahead with your best friend as your sales manager, at least for now. He isn't performing up to expected levels, he's using his own money, and he wants company shares to solidify his commitment. This is potentially a problem for both of you.
If his lack of accomplishment is due to a lack of commitment due to low salary and no stock, how can you be assured that simply giving him a piece of the company will increase his commitment and his sales? You can't. It would seem that as a new employee, having put his own money into the deal, he should have been sufficiently motivated to bring in the sales. But this is not the case. Something else is the problem.
If he is looking for stock to increase his motivation, commitment and performance, he might suffer all around if, given stock or stock options, his performance does not adequately improve. His obstacles to success may be due to the market, the product or his own skill set. The research in the area of employee stock ownership does not always show an increased work ethic or increased company profitability. Therefore, your friend certainly needs to demonstrate a commitment and clear sales before you offer him company stock.
I suggest that you discuss the situation with him. Evaluate cost projections, sales and return on investment. Once the risks and advantages are clear, map out a strategy to identify leads, present and sell the product, and look forward to revenue. Next, identify timelines for him to meet your mutually agreed-upon sales goals. At both of these points, you need to identify any obstacles to success. This is where you will probably uncover the real issues at stake: his skills, abilities, confidence and contacts.
If he's willing to put in the time and effort necessary to meet standards and goals, then I would suggest an increase from the minimum wage to demonstrate your trust in him. So far, you have little or no confidence that he will succeed for himself, for you or for the company. Therefore, it would be unwise for you to give away company stock at this point.
However, this is also the time to discuss the potential for company stock. The cardinal rule is performance equals profits and, in this case, profit sharing. When he actually meets the performance deadlines and when revenue goals seem likely, then I would offer him predetermined stock. But until he performs adequately, in my opinion, you would be throwing away your money by giving him shares without the basis of past performance or a solid potential for future performance.