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ESOP’s leadership #3 | Never underestimate motivation #2 | How an ESOP motivates managers individually

ESOP’s leadership #3 | Never underestimate motivation #2 | How an ESOP motivates managers individually

In the last episode, we had a chance to peek into our manager motivation at our firm, and together with Jaroslav Havel we summarised the basic theses and principles of what we think about the employee stock ownership plan right here at HAVEL & PARTNERS. Today, I would like to show you an ESOP from the perspective of individual motivation of managers. I believe that this article clearly demonstrates the enormous potential of ESOPs for (not only) Czech companies.

In the current situation of basically non-existent unemployment, I believe we can agree that having not only capable but also motivated managers in your company’s management is absolutely crucial for its success. Motivation of managers should be top priority for all founders. Now let’s take a little closer look from a psychological rather than legal perspective, as we think it’s necessary.

Internal and external motivation

One of the possible theoretical approaches to manager motivation is to distinguish between external and internal motivation. To ensure the motivation of their vital people, companies commonly use external motivation. At internal meetings, they instil their corporate values into managers, they may put (negative) pressure on managers to meet predefined targets and, perhaps most typically, they develop incentive systems, pay bonuses, and raise pays to positively motivate their managers. These methods of motivation are, of course, justified, and irreplaceable. But what about trying to look at motivation from a different perspective and taking a slightly different approach to manager motivation? Are there any other ways of improving the motivation (and therefore performance) of managers? 

The answer can be found in maintaining and increasing internal motivation. Why? Because internally motivated managers will act more out of their own (internal) motives and with complete autonomy. Such managers regulate and motivate themselves, are more interested in their work, are more active, enthusiastic, and confident. They don’t need anyone to keep an eye on them. This in turn leads to higher performance, persistence, creativity, and greater satisfaction. And that, my friends, is scientifically proven. 

I often hear that external motivation must be employed where internal motivation is not enough. Why is this a bad reasoning and why should we try to encourage internal motivation? Motivating managers only externally and strengthening their external motivation (i.e. only by increasing their pay or bonuses) reduce the already low level of their internal motivation, leaving them completely motivated by external factors. 

The autonomous manager, who used to do his job because he enjoyed the work and found satisfaction in it, has become an employee motivated by carrots and sticks. And if there is no reward or punishment, the manager stops performing. This does not mean that it is appropriate to give up on motivating managers externally – not at all! However, it is not appropriate to use bonuses and pay rises as the only means of reward. On the contrary, you need to add something to support and ideally to increase internal motivation. 

So what should we do when we feel that managers lack internal motivation, or when we want to maintain or increase their internal motivation? At this point, you won’t be surprised by the answer – go for an employee stock ownership plan.

ESOP as a decisive response to the lack of internal motivation

An employee stock ownership plan, if set up correctly, must inevitably strengthen the internal motivation of managers in a fundamental way. With an ESOP in place, the majority owner ensures that the managers are less focused on themselves and their own benefit (within the company), but more identified with the company (in which they have a stake), its goals and its strategy. Such managers demonstrate:

1. Significantly higher sense of responsibility

The manager perceives that he is part of the company. The majority owner has (somehow) handed over part of his share in the company to the manager. That brings a great sense of responsibility for someone like that. Now the manager works for himself and his own entity, for his family, and he cares about where the company’s future in a year, 5 or 10 years.

2. Identification with the company and its goals

By becoming part of the company himself, the manager is able to identify more with the company and its goals. Thanks to this, even the majority owner can rely on the fact that such a manager will, of his own free will, take care of meeting the company’s goals, both by fulfilling them himself and by motivating his reports to do the same. 

3. Less absenteeism

In this position, most managers realise that any absence will reduce their opportunity to be better off. In such a case, the amount of absenteeism is extremely reduced, as the manager knows that he is also harming himself. The majority owner does not need to control such managers much in this respect. It is the manager himself who sets his internal control.

4. Less quitting

Although listed as a fourth aspect, this is absolutely crucial in some cases, companies or entire sectors. Every company goes through some turmoil if a key manager quits on his own initiative. In this case, the majority owner or other key managers have to focus on finding a new manager and making the handover of the necessary agenda as easy as possible. In any case, there will be some degree of disruption to continuity. 

Frequent management changes entail considerable instability for companies, which even without this have many other challenges and issues to deal with. Not to mention companies with large amounts of extremely sensitive information, security clearances, or companies developing and selling unique and highly classified products. 

We’re not re-inventing the wheel. Taking care of your own thing (even if shared with the majority owner) will always be significantly better than taking care of a thing that belongs to someone else. What comes on top of it is just a nice-to-have.

After introducing an ESOP, some of our clients are surprised by certain positive consequences they haven’t even considered. Once a manager in charge of one business unit receives a stake in the company, he will start helping the other business units on his own initiative in any way he can, because now the success of the other business units is the success of the whole company in which the manager has a stake. This often leads to an incredible change in the attitude and general “mindset” of the manager. 

Repeatedly, even the managers themselves say that they feel there is a certain psychological contract between them, the company, and the majority owner, which makes them believe they have greater commitments and responsibilities towards the company, and for this reason they do not quit. 

I have to say that some of the stories of our clients and the transformation of managers make us very happy. Let me thank our clients once again for allowing us to be part of it.

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