All About Equity Compensations

An organisation may offer equity compensation to employees in exchange for ownership of the company. There are many forms of equity compensation, including stock options and performance shares. Equity compensation can be shared by employees who are able to appreciate the company's profits.

Many companies, particularly startups, employ equity compensation. This strategy is often used by startups and small businesses in a growth phase. They might need to use a significant amount of their working capital for investment in expansion or business growth. Sometimes they don't have enough cash to attract or keep talented employees. Companies often opt for equity compensation to make their compensation packages more attractive. Equity compensation can sometimes mean a lower salary than the market.

Equity compensation, in its best form, can align individual employees' interests with company goals. This can foster a sense of camaraderie among all stakeholders and increase innovation and longevity. This creates value for the company and its customers, as well as its employees.

Types of equity compensation

Stock Options

Stock options are stock options that allow employees to buy shares of company stocks at a set price. This is called the exercise price. After working for the company for a certain time, employees can take control of this right. Option vesting gives employees the ability to transfer or sell this option. This helps employees stay with the company for longer periods of time.

Incentive Stock Options

Other types of equity compensation include NSOs and ISOs. Employers do not need to report the time they are granted this option, or when it is used. ISOs that provide tax benefits are only available to employees and not directors or consultants.

Limited stock

Restricted stock units signify a company's promise that it will pay shares according to a vesting schedule. This is a benefit to the company but does not grant employees any ownership rights until the shares have been earned and issued.

Performance Shares

Only employees who meet certain metrics will be awarded performance shares. These metrics can include return on equity, earnings, or total return of company stock relative to an index. These shares are usually for a long time period.

The benefits and drawbacks of equity compensation

Equity compensations can be a great corporate-finance strategy to start-ups. Equity compensations are offered to companies that are just starting out and don't have enough cash to compensate their new employees. Stock options also align your employees' interests with your company goals. Stock options can motivate employees to work for the company's benefit. This increases employee retention. The company's ability offer rewards will increase your employee value proposition. This makes the company more competitive in the market.

Founders can sometimes give away too much of their company's ownership by offering too high levels of equity pay. With careful strategic planning, this could be avoided. According to the National Centre for Employee Ownership 76% of eligible employees opt for stock options. If you offer equity pay to your employees, most of them will take it. This adds to the work load for the compensation department.

Conclusion

Equity compensation is not guaranteed to pay off. You can't know if this will pay off, unlike your salary. A fair and balanced negotiation with cash and equity components is considered a good deal.