Equity compensation has proven to be an important consideration for employees—which makes it important to employers as well.
Did you know that in 2021, half of employees under the age of 35 rated equity compensation as “important” when thinking about switching jobs? And that restricted stock units (RSUs) have now become the most common type of this kind of equity compensation? As a business owner, offering stock is becoming a must-have on the list of things to offer potential new employees, as well as in retaining valuable team members. Here’s what to consider.
What’s equity compensation?
First, equity compensation is not a cash vehicle. As a business owner, you outlay no cash to offer this incentive or compensation. This can be an upside for startups that may be cash strapped. You may want to put cash into another part of the company, like a new growth initiative or capital expenditure that will improve your position long term, but need to entice talented staff to stay the course while the yields of your investments take shape.
Types of equity compensation
These are performance shares, stock options and RSUs. Performance shares are awarded in conjunction with meeting benchmarks or performance targets. And are a great way to incentivize or sweeten the deal with executives who have specific metrics to meet and can supplement cash incentives or be used on their own.
Regular stock options are regular shares of your stock that have an agreed upon “strike price.” You set a purchase price in advance, and your employee has the option to exercise that right at any time to buy stock. These require a vesting period so that employees are incentivized to stay with your company longer term.
Among 325 companies that were surveyed, 72% used RSUs in their executive compensation programs. RSUs usually have a vesting schedule, but as soon as they vest, employees can do whatever they like with them – just as if they bought them like any other stock.
Deferred compensation is another way to entice executives. Simply put, part of your employee’s pay is held now for disbursement later. If highly compensated and over 50, an employee can take maximum catchup contributions and substantially reduce their tax burden. Income tax is also deferred for the employee until compensation is paid out – which could be when they retire. If they’re in lower tax bracket at retirement, they can potentially save on taxes.
As with all types of compensation packages, there is no one-size-fits-all. Determine your goals, evaluate your options and talk to your advisor about structuring the right plans for your company.
As you can see, recruiting and retention strategies take some thought and planning. Here are some things to think about for 2022.
Sources: vlplawgroup.com; forbes.com; HBR.org; eqapplied.com; indeed.com; forbes.com; investopedia.com; Eexeccomp.org; foley.com