Incentives to Tie Employees to the Company

Incentives to Tie Employees to the Company

Over and above the monetary compensation, many companies invest considerable efforts in creating a work environment that will bond the employees with the company and encourage them to stay with it. Recruiting a talented employee is only the first stage in the battle to keep him or her with the company. In times of prosperity on the capital market the demand for good workers is high, thus increasing the turnover rate of employees. Companies are required to make significant investments to train employees for their positions in the company, and employees reach their maximum productivity only after a certain period of adjustment. Therefore, the departure of a skilled worker translates into a significant loss to the company, far greater that the loss resulting from a failure in recruiting new employees.

Many companies have been forced to increase their employees' compensation several times a year in order to keep them with the company. Option packages were an effective tool when companies managed to raise capital based on ever-increasing values. However, this effectiveness diminished when the value of the companies dropped during 2000 and 2001. Such impact was visible not only in startups, but also in more established companies. For instance, in late 2000 approximately two-thirds of Lucent Technologies' employees held options with exercise prices higher than the price of the share.

The importance of the alignment of interests between employees and the company and between them and other employees cannot be overrated. This unity alone is, however, insufficient—particularly in a market with excess demand for skilled workers. Employees need to feel that the company treats them as one of its important assets, not merely as a production mechanism designed to produce a higher yield than the cost of their salaries. Therefore, many companies offer various services to enhance the employees' and their families' quality of life. In the United States, for instance, it is customary to offer employees a contribution towards kindergarten and schooling expenses, or even to maintain day care facilities in or close to the company's offices. In addition, it is customary to organize various adventure outings for the company's employees and families, vacation packages, and holiday events.

In conclusion, from the points of view of the entrepreneurs and the investors, it is the effectiveness of the overall compensation package, which includes monetary and other rewards that is important. Every employee has different preferences regarding the monetary and non-monetary rewards that affect his or her decision to work with the company. It is the duty of the company's officers to put together a package of employee benefits that will attract the employees who match the profile of whom they want to recruit, that will enhance the productivity of such employees while with the company, and, of course, that will reduce the turnover rate of employees as a result of defection to other employers.

Considerations in Employment Termination

Alongside various means of bonding employees with the company, in both employment contracts and the company's procedures, attention should also be paid to the potential termination of the relationship between the company and the employee. For instance, various employment contracts often address the issue of non-competition. Any restrictions on competition have to take into account the laws of the state in which the agreement is applied, with respect to restrictions on employees' freedom of employment. Some states in the United States impose various conditions on the validity of various occupational restrictions.

Similarly, many employment contracts address the use which employees can make of the professional know-how they accumulated while working for the company. It is often only in legal suits against former employees that a discussion is conducted with respect to various distinctions between know-how pertaining to the industry in general (which is ostensibly the employee's property, even if it was acquired while working for the company) and know-how that is unique to the company and is a trade secret of the company (for further discussion of employment relations in the context of trade secrets, see Chapter 5 on trade secret laws).

Finally, many contracts address the options to which the employee will be entitled after leaving the startup. In many cases, employees are entitled to exercise the options that would have vested had they waited for the next vesting "milepost," even after leaving the company.