Recruit and retain your staff with equity compensation

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.

Quick overview

Stock options

• Employees don’t have to exercise the right to buy the shares
• Encourages employees to stick with a company for a longer term with a vesting schedule
• Negotiating an optimal strike price keeps employees engaged
• Employees can sell or transfer the stock when they purchase the stock at vesting time
• You can build in an expiration date so that the stock has to be purchased by a certain point in time

RSUs

• Less risk for employees
• RSUs are always worth something – no strike price to consider
• Most-used type of equity compensation
• Worth full value at time of vesting
• Don’t have to pay dividends during vesting period
• Save on costs around custody and proxy voting

Performance shares

• Granted when a milestone is met
• Great to incentivize employees as an add-on or standalone
• Usually are not outright shares of stock
• Link stock to long-term performance of company
• Create strong alignment between employees and the performance of the company
• Investor-friendly

Deferred compensation

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 catch-up 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 a lower tax bracket at retirement, they can potentially save on taxes.

Benefits

• Another tool in the executive compensation toolbox
• Can result in tax savings for the employee
• Can incentivize highly compensated employees

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.

Next Steps

As you can see, recruiting and retention strategies take some thought and planning. Here are some things to think about for 2023.

• Take a look at your compensation packages – are they in line with the current market?

   

• Consider adding nonmonetary perks like flex time or flexible vacation days.

   

• Talk to your advisor about different compensation options.

Sources: vlplawgroup.com; forbes.com; HBR.org; eqapplied.com; indeed.com; forbes.com; investopedia.com; Eexeccomp.org; foley.com