By Kateryna Kyryllova. Equity-based compensation has long been used by publicly traded companies to reward their executives. Now, however, a growing number of private companies are looking for ways to compete for executive talent by offering their own version of equity incentives. What are the key considerations in starting the equity plan and who will benefit?
In our recent webinar, 5 Building Blocks for a Successful Equity Comp Plan: A Focus on Private Companies, we asked attendees if their private company is currently offering equity compensation. The graph below shows the poll results:
When thinking about equity compensation plan, you should decide which employees will be eligible to receive equity. Broadly, there are two methods of share allocation; both have their pros and cons and distinct differences when it comes to employee perception.
A broad-based plan is a great way to create an ownership culture. By giving shares to a broad range of employees across the company, employee interests are aligned with the company goals.
Executive-only incentive plans allow companies to use limited equity and focus those shares where they can make the most significant impact.
Both methods offer several benefits to a company:
- Stock gives employees an incentive to see the company succeed. It helps staff maintain a long-term mindset and it gives employees a reason to stick around.
- In this National Center for Employee Ownership article, the NCEO notes that employee-owned businesses perform better than their business counterparts.
- In addition, offering some stock as compensation means that you don’t have to spend as much on salary. This helps keep your expenses low and allows you to reinvest cash back into the business.
However, there are a few concerns about issuing equity. There is always a risk of giving away the ownership of the company. Usually employees represent just a small percentage of the company’s stock, but founders need to be careful about the rights and responsibilities they will be giving away with equity.
No matter how you structure your programs, the fact is that equity-based compensation is always more complicated than cash. If you haven’t been immersed in the complexities of a stock option plan, you might not realize how many different areas of the company are directly involved in administering the equity compensation lifecycle.
If you are new to equity compensation, or don’t have a dedicated resource to manage it, an equity plan management solution will simplify and streamline all crucial aspects of stock administration and reporting while you focus on your strategic priorities.