Determining Eligible Employees: from Entry Level to Top Executives

By Kateryna Kyryllova. When building an equity compensation plan, companies have to consider which employees will be eligible to receive equity. Are you looking to develop an executive-only plan focusing on senior management or a broader program where all employees may participate? Both have their pros and cons, and pulling guidance from larger corporate goals and vision can help you lay out a plan that will drive the right results.

Executive-only incentive plans allow companies the benefit of using limited equity and focusing shares where they can make the most significant impact on corporate performance. Executive-only plans can be easier to manage since there will likely be fewer participants and grants to oversee. Consider the depth of resources for stock plan administration, as companies should be aware of the ongoing administrative burden when deciding how many employees to include.

A broad-based plan offers shares to a wide range of participants, and it is a great way to align employee interests with company goals. Broadening the participant pool helps to recruit and retain talented employees at all levels and can create a competitive advantage.

For private companies considering a broad-based plan, always be aware of the liquidity issue. Since there is no market value of private stock, employees cannot convert their equity holdings to cash until a liquidity event occurs such as an IPO, or a buyback program. This can lessen the perceived value for broad-based participants. Another concern of broad-based equity plans is dilution – the shares reserved for and ultimately issued to employees under the plan reduce the percentage of the company owned by the existing, founding shareholders.

There is a range of possibilities in choosing employee eligibility criteria. The company’s choice is usually based on several factors such as ownership structure, business strategy, and the role of different types of personnel in growing and managing the business. You may also want to benchmark by who you are competing with for talent, and consider industry practices or location specific trends. The graph below shows the most common allocation of equity by role type.

Allocation of equity by role

Source: Through a Different Lens: Retaining and Engaging Talent Through Alternative Equity Programs (Aspiration workshop hosted by Stock & Option Solutions, sponsored by Certent)

Companies may set unique eligibility requirements. For example, a company may require a new hire to wait a prescribed period before participating in the plan or seasonal/part-time employees working less than 10 hours a week may be excluded from participation. You can also offer different types of awards to different employee groups, e.g., restricted stock for C-level and stock options for managers.

Building a solid equity plan from the ground up requires time, effort and involves many stakeholders across your organization. For private companies considering implementing an equity plan, read our Complete Private Company Equity Plan Blueprint ebook for guidance on how to build the foundation of a successful equity comp program.

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