A main factor for the long-term success of family firms is entrepreneurial non-family employees. But a perennial and still unanswered question is: how can family firms make their non-family employees behave entrepreneurially, meaning that they recognize and explore entrepreneurial opportunities, that they develop and implement new ideas? That they think and act as if it would be “their” company?
One might intuitively think of making those employees actual co-owners of the family firm through employee stock ownership plans or of other financial incentives. Those approaches, however, have important disadvantages.
Most business families are reluctant toward giving or selling company shares to non-family employees as this would dilute ownership and control rights, which opposes the dominant wish of business families to control their firm in the long run. Moreover, problems arise when non-family employees do not perform or wish to exit the firm; this is aggravated by the fact that the actual value of firm shares is difficult to determine in privately held firms. Also, dividend payments to non-family members constitute a financial burden for the firm. Last but not least, the effect of employee stock ownership plans on employees’ attitudes and behavior is heavily doubted in the scientific literature.
Similarly, financial incentives such as profit shares or bonuses that are tied to entrepreneurial behavior-related criteria have the disadvantage that they only address extrinsic motivation. As such, entrepreneurial behavior is just a means to an end and not something that non-family employees strive for intrinsically. Put differently, monetary incentives are unlikely to foster entrepreneurial behavior in the long run as “money wears off”.
If employee stock ownership plans and financial incentives are not very promising, what is an alternative solution? Recent research indicates that neither formal ownership nor money count, but ownership feelings, so-called psychological ownership. Psychological ownership among non-family employees implies that they feel that the family firm is actually “theirs”, that they say “this is MY firm”, even though they are not formal owners. The underlying logic is quite simple: someone who feels like an owner will think and act like an owner, whereby an “owner” can also be a psychological owner. When non-family employees regard the family firm they work for as their “own”, they perceive the firm to be a part of their “Self”, as a part of their identity. Consequently, they want to achieve that the family firm performs well. And how can those psychological owners make “their” firm perform well? Through entrepreneurial behavior, which is a well-established antecedent to firm-level performance.
Ownership feelings can be enhanced in numerous ways, for instance by increasing the non-family employees’ perceived control over the firm through a more participative leadership style, more delegation and autonomy as well as more decision-making power. Also enhanced access to critical firm information as well as a salary that is perceived as fair can facilitate the emergence of ownership feelings.
To conclude, family firms who wish to enhance their non-family employees’ entrepreneurial behavior should be aware of the crucial disadvantages of employee stock ownership plans and financial incentives and should seriously consider to foster the non-family employees’ psychological ownership toward the family firm instead. Thinking of a classic principal-agent relationship between family firm owners and non-family employees, research has indeed shown that psychological ownership can turn agents into so-called “psychological principals” who think and act like if they would actually own the family firm themselves.