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Creating Entrepreneurial Employee Ownership at SAIC

J. Robert Beyster, Founder, CEO, Chairman, Science Applications International Corporation (SAIC)

SAIC has an interesting recruiting and retention challenge. It’s an extremely diversified, decentralized, $7-billion, employee-owned corporation. Just to give you an idea, SAIC has over 500 divisions operating somewhat like their own companies, although quite often they must act in unison to perform on large contracts. At any one time, we have more than 5,000 active contracts.

I would estimate that half of our 44,000 employees are directly involved in entrepreneurial activities—building an organization, proposing new ideas, exploring how our existing technologies and services can be applied to new customers and/or leading proposal efforts to bring in new business. Our challenge: to recruit, retain, and reward entrepreneurial people, who are also team players, in order to grow the company.

Why is growth important to us? First, at the top of the list of what drives entrepreneurial employees are new and exciting opportunities. Growth provides these opportunities. Second, growth enables us to provide a healthy return to our employee shareholders.

Yet growth is a double-edged sword. The difficult side of growth comes with managing growth—ensuring it is financially healthy, increasing our efforts to incorporate new employees into our employee ownership culture, making sure the right leaders are in place to manage increasingly larger organizations.

In addition to new opportunities, entrepreneurial employees want to be rewarded for their efforts—they want ownership in what they are building. We've worked hard to create "entrepreneurial employee ownership" at SAIC. Our ownership philosophy is, "those who contribute to the company should own it, and ownership should be commensurate with employee contribution and performance as much as feasible." We go to great lengths to ensure all employees are encouraged and given the opportunity to own SAIC stock through stock purchases, a 401(k) plan, and an ESOP. Also, a number of SAIC’s programs target performance-based equity incentives to all employees.

Ownership as Reward

Each year we set aside stock to be offered as stock options and stock bonuses to employees based on past and future (expected) performance. The total bonus pool is determined by the company's financial performance for the year and is allocated among all operating groups based on the group’s respective performance. The option pool is based on projected growth and is used by the groups to incentivize the performance required to meet strategic goals. At year-end, about half of our employees receive a bonus comprised of cash, bonus stock (restricted and/or unrestricted), and stock options. All employees are eligible, but the management team determines who receives awards.

Ownership as Incentive

To focus employees on specific performance targets, we initiated a negotiated stock option program. A written agreement is set e between a manager and an employee promising the employee a fixed number of stock options if he or she meets meet a stated performance goal. The goal can be bringing in a certain level of new business, completing a contract on time and under budget, or preparing a winning proposal for a contract. Employees understand what is expected of them and what goals are critical to the company. It is a powerful incentive tool.

Aligning Employee and Company Interests

For our senior managers, the goal is to have them acquire stock holdings of three to five times their annual salary over five to ten years. They are encouraged to purchase stock at our quarterly trades and receive stock bonus and option awards to get them to this level. Having a management team with a significant investment in company stock helps align their interests with the company's strategic goals.

Stock Purchases Build Commitment

All employees are eligible to purchase stock at our quarterly trades. Any employee who desires to purchase SAIC stock notifies his or her manager, who determines if the employee is deserving of matching option shares. A study we conducted several years ago proved a correlation between stock ownership and retention levels. Among employees who had been with the company for at least three years, those who had never purchased stock had a turnover rate of 12 percent while those who had purchased stock, whether it was a few shares or many shares, had a turnover rate of 5 percent.

Retaining Future Leaders

A few years back we recognized a problem. The company was growing fast, and thus hiring fast, and many of our emerging leaders—those not yet in the senior ranks but clearly with the potential to be—were not building their stock account balances fast enough to keep them from being enticed away by other companies.

We developed a program to retain these future leaders. We set up a deferred stock compensation plan (using a Rabbi Trust) and now, each year, we make some 200 awards valued at approximately $25,000 each to employees identified by management as key to the company's future success. This award is invested in SAIC stock and held in the trust as it vests over seven years at 0 percent for the first four years and 33 1/3 percent for each of the last three years. During this period, hopefully, the stock increases significantly in value and the employee assumes a leadership role in the company.

Unvested stock balances, or what we call "glue," are important to retaining employees. Our stock bonus and stock option awards vest over four years. Our goal is to ensure that top performers receive annual stock awards so after a number of years the value of their unvested stock is meaningful enough to make an employee think twice before accepting another offer.

We also use restricted stock and options in the recruiting process to bring in key individuals. We've had employees and new recruits turn down offers of significantly higher short-term compensation because the entrepreneurial, employee-ownership environment and rewards SAIC offers over the long-term were more attractive.

We recognize that stock is only one piece of the puzzle in recruiting, retaining, and rewarding top performers. At SAIC, it is a core component of our strategy for growing this entrepreneurial, employee-owned, high-technology corporation. Indeed, it has given us a significant competitive edge.

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