We are all fully aware of how the pandemic affected the labor market last year. In March and April of 2020 alone, more than 20 million workers lost their jobs, with many of them remaining out of work for months or longer. The economy was clearly crashing, and then, very tentatively, started to ascend earlier this year.
While we may have thought that was the end of it, we’re seeing it was only the beginning of the pandemic’s effects on our economy. Somehow, within a year’s time, the leverage shifted drastically from employers to employees. In fact, I recently read a Washington Post article reporting that a record number 4.3 million people quit their jobs in the month of August alone.
The Whys of the Resignation Letter
One of the things that struck me most is that over the past twenty years, when we’ve experienced higher numbers of employees resigning, there was also higher confidence in a very strong economy, providing the cushion most people need to risk the security of their regular paycheck. It typically does not happen in a volatile and unpredictable economy or during challenging times fraught with unknowns.
It made me wonder how we went from millions of people out of work, scrambling to find any job to now 2.9% of the workforce leaving those jobs in under a year. It seems that when the pandemic shook our mindsets in countless ways, it completely revamped how we view our jobs, or lack thereof. And questions abound – Is it that there are other opportunities out there, with better pay? Is pay no longer as prioritized because people are searching for something more fulfilling? Are people more restless now?
There are indications that it is some combination thereof. This is coupled with the fundamental shift in employees’ thresholds for what they will, and will not, deal with as it relates to work. Most have become accustomed to working remotely, and as such, are not as willing to partake in stressful commutes or long hours. Others are taking a more scrutinizing look at what they are being paid compared to what they feel they are worth. Still others continue to have direct pandemic related issues, such as concerns over safety, healthcare, and childcare for their children. Whatever the reason for the shift, the data demonstrates an abundance of confidence among employees and stronger bargaining positions overall.
Additionally, the employees that continued to be employed last year, who often worked with a skeleton team (or no team at all) are completely and utterly burnt out. For a year, they carried not only their own weight, but the weight of their absent team members, trying desperately to help sustain their company in any way they could. They’re exhausted. And they want (and quite frankly, deserve) to be appreciated. Unfortunately, some employers haven’t handled those situations post-pandemic as well as they should have, causing those loyal employees to search for greener pastures where they will be appreciated.
Is It a Matter of Supply and Demand?
Regardless of the reason though, there were a reported 10.4 million job openings at the end of August. And plainly, that’s a lot of leverage for employees looking for “something else.” Maybe it all comes down to Economics 101 – Supply and Demand. The supply of well-paying jobs is outnumbering the unemployed, and employees are, whether consciously or unconsciously, reevaluating their options.
One thing is for sure – we haven’t seen the full effects of the pandemic on the workforce yet. It remains to be seen when the leverage will balance out, causing more stability. In the meantime, many employers are reacting with increased pay to try to find and retain qualified candidates. They are also (or should be) investing in retraining and skill analysis for their employees, who need new skills to work in the hybrid model for which so many employers are opting.
Barker Associates has extensive experience in helping corporations shift and maintain alignment with the changing needs and requirements of the economy. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.
Corporate Governance Trends and Their Effects on Investor Behavior Where We’ve Been; Where We’re Going
A Harvard Law School Forum on Corporate Governance study conducted earlier this year identified the global corporate governance trends that would impact businesses in 2021. The study was based on interviews with investors, pension fund managers, advisors, and other corporate governance professionals from around the world. As the new year approaches (I know, I can hardly believe it myself!), we thought it was an ideal time to check back in on these trends, as we navigate what investors may be looking for going forward.
For the United States, the trends have been focused, in part, on the following topics:
Diversity, Equity, & Inclusion (DE&I)
Environmental, Social, and Governance (ESG) Oversight & Disclosure
Corporate Culture & Human Capital Management
Technology & Cybersecurity
Virtual Shareholder Meetings
Social and racial issues gained unprecedented attention in the United States last year, and companies are responding. They are now incorporating far more aggressive initiatives to address DE&I concerns to increase racial and ethnic diversity, especially on the board and at the C-suite level. But if they plan on bringing on investors, they should maintain or even increase these efforts.
Investors are holding more companies accountable, demanding increased disclosure of key data on diversity, equity, and inclusion. They expect improvements in these areas and full disclosure of the company’s data. Some states and institutions are taking it a step further. The study notes that “California law now requires that by the end of 2021 public companies headquartered in the state have at least one director who is from an underrepresented community. NASDAQ has proposed a similar listing requirement, which is subject to approval by the Securities and Exchange Commission (SEC).”
ESG Oversight & Disclosure
There has been a rise in ESG reporting standards over the past year. Investors are increasing their support of ESG oversight and disclosure, and are holding directors responsible if those standards are not met.
Now, private equity firms and other private companies are also increasing their focus on ESG. All boards should expect to start being held more accountable for ESG disclosures by their stakeholders. Key considerations should include (1) if they have ESG data ready for review, (2) if they have considered shareholder interests when creating ESG initiatives, and (3) whether ESG has been integrated into their business strategies and financial planning.
Human Capital Management
The consequences of the pandemic and social justice movements for businesses have led to an increased demand for Human Capital Management (HCM) data, such as gender pay gap, safety incidents, and employee turnover.
The SEC has adopted new HCM disclosure rules on the premise that employees are key to an organization’s value. Those rules require a description of the company’s human capital resources, including applicant attraction and employee retention and development measures. Investors also have increased expectations and are demanding increased board oversight of HCM and corporate culture issues.
While executive compensation has always been a consideration for investors, it is under increased scrutiny now. With the unique considerations brought about by the pandemic – company acceptance of federal aid, mass layoffs, and overall employee treatment during the pandemic, investors are looking more closely at compensation paid to the C-suite. Companies should be carefully scrutinizing the compensation paid to upper management compared to how the pandemic affected their frontline workers and be ready to address disparities.
Technology and Cybersecurity
As a necessary result of conducting business from afar, technology use has exploded over the past year. Unfortunately, with all of the benefits it provides, increased technology use also increases security risks. This year, and going forward, investors want to see that cybersecurity needs to minimize those risks are a part of both the company’s financial planning and overall strategic business decisions. Companies should be prepared with additional board oversight and disclosure on these matters.
Virtual Shareholder Meetings
As shareholders and directors adapted to virtual life last year, many began the process of permanently leveraging the methods used, and their associated efficiencies, post-pandemic. Most of what is emerging is some form of a hybrid model, where at least one annual meeting remains virtual, along with other smaller meetings, while other meetings transition back to face-to-face.
Barker Associates has extensive experience in corporate governance issues, especially as they pertain to financial considerations and investor scrutiny. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.
Equity Makes the World (or at least Businesses) Go Round Know What You Have Before It Stops Turning
You’re an entrepreneur. You wake up one day with a brilliant idea on how to make people’s lives easier and/or make the world a better place – and you cannot wait to get started. Congratulations! On that day, you own 100% of the equity in that idea. But as that idea solidifies into something tangible, equity becomes a bit more convoluted.
Most likely, you will not be able to transform that idea into a product or service on your own. You will need some help. And unless you have boatloads of cash laying around (that would be nice), you will have to figure out another way to compensate others for their expertise. Many times, that exchange agent is equity. But before you rush off and give it away, risking devastating consequences, up to and including, losing any interest in your own idea at all, there are some important issues to consider.
All in the Family Equity
Oftentimes, you are not dealing with an angel investor or capital venture firm right off the bat. It is far more likely that your first experience with equity discussions will happen with friends and family who “want to you help you” with your new venture. Now, my quotes do not mean they don’t actually want to help – of course they do. But when it comes to money and the idea of making a lot more of it because of someone else’s brilliant idea, situations tend to get very sticky, no matter how close you are to the other person.
The best advice I can give when it comes to giving equity to family and friends is to think before you act. I mean really think before you act. You cannot afford to be impulsive here – literally cannot afford it. Don’t just think about the highs you will experience together. In fact, try not to think much about them at all (counterintuitive, right?). It’s far better, albeit unpleasant, to think about the extreme lows and what they would look like with the equity distribution you’re considering.
What About Employee Equity?
If your business has employees and you are considering an Employee Stock Option Plan (ESOP), you should start with your equity allocation to principal management. The rule of thumb for the allocation of equity to senior management and advisors is 15 – 20%, but as always, it depends on several factors and even timing. For example, perhaps you plan on hiring a CEO/President in the near future. In that case, you will want to reserve some equity for that person.
Employees in technology and financial positions are critical in most companies, especially as they are in a growth phase. As such, the majority of the allocation should go to these positions. In contrast, when you think about sales executives, you should take into account their commissions (that most management won’t receive) when considering a lower allocation of equity.
Another consideration is vesting equity ownership as an employee incentive to perform well and stick with it while the company evolves from start-up to success. My advice is to keep these agreements simple and the terms the same for each group.
But Wait … There’s More Other equity considerations include:
Equal split of equity and decision-making with a Partner(s). Proceed with caution and have everything laid out in your agreement. Remember clear leadership for the team and company is crucial for progress.
Conduct proper due diligence and background checks before giving equity to anyone. Otherwise, you not only risk losing equity, you also risk damaging the company’s reputation. Due diligence should include speaking with other entrepreneurs with whom they have invested. The right investment partner will offer invaluable wisdom and advice.
Maintain accurate records. Every transaction should be documented – whether you are a one-woman company or a Fortune 500 company. Document everything, including initial capitalization.
Refusal to part with any equity. Some entrepreneurs refuse to give away any equity, which is not usually ideal either. Sadly, many end up owning 100% of nothing in the end.
If, after all of these considerations, you decide that giving some equity away is in your (and your business’s) best interests, then the allocation should be clearly documented in a Stock Option Agreement. This will spell out the terms of vesting and all criteria, and can be a very simple document, as long as it clearly lays out expectations and terms.
Remember, entrepreneurship is an emotional roller coaster that you have to continue to ride – there simply is no getting off when you need a break. And after that sky-high feeling of things going great, you often plummet back to earth – those are usually the times when you don’t have enough cash, start to jeopardize your own personal finances, and make quick judgments that have long-term effects. So, think through your equity considerations carefully and do your due diligence to keep your business going round.
Barker Associates has extensive experience in equity allocation and agreements. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.