Valuing “Sweat Equity”

Do you ever find yourself amazed at how you have managed to overlook the obvious? I am not talking here about finding something in a place you have already searched 3 times (what my wife calls "male looking", even though she has also done it), but how sometimes you can overlook an obvious connection.

I experienced this recently. I was talking to someone about my method of creating employee ownership and they asked, "How does that differ from a co-operative?"

I was stunned, because I had never linked my concept of Human Capital with the co-operative model, nor, at an even more fundamental level, with the collective approach of pure socialism. Yet valuing employees and making them co-owners of the business to the extent of their value, clearly has similarities that warrants closer comparison.

Consequently I am in the process of developing a comprehensive answer. In the meantime, however, let me reassure you that my Zealise model does not erode the structure of a traditional commercial company. Certainly it adds a new dimension by acknowledging the people contribution, but Human Capital is essentially just a formal recognition of the age-old concept of "sweat-equity." To that extent it simply recognises that the people who actually carry out the corporate mission play as important a part in the business as the people who provide the capital equity.

The traditional argument is the one of risk and reward – that the shareholder risk is the greatest and so he is entitled to the rewards for taking that risk. I have no quarrel with that philosophy, but would simply point out that they are not the only ones who are taking a risk. The people who commit a third of their waking life to that company are also taking a risk. Who says that lost livelihoods are not just as serious as failed investments?

Indeed it could be argued that they are more serious. Not only are investors less likely to have "all their eggs in one basket" in the way that an employee does, but the investor arguably has more ability to guide the operations of the business and shape its outcomes. Employees can lose their livelihoods by challenging management or through simple management incompetence, while the astute investor can protect himself from such calamities.

In recognising this historical shortcoming and addressing it, the Zealise model in no way subtracts any of the powers of the shareholder. These remain completely unchanged, except for the indirect consequences of giving employees a greater say. And while many might argue that this is tantamount to a diluted stake in the business, I would suggest that it is no such thing, for two reasons.

Firstly, employee ownership means greater employee engagement which has to have a positive effect on the company's results. This means that, even if shareholders have a reduced stake, it will be more likely to be in a bigger pot – especially if ridiculous incentive schemes and their dubious benefits are simultaneously removed.

Secondly, employee ownership is more likely to offset the short-term thinking so prevalent in the economy today. Employees' vested interest in ensuring their livelihoods will create a greater focus on long-term business sustainability.

Sweat equity definitely needs to be recognised beyond just the business start up.