The Basics of Equity and Executive Compensation
In the past when an employee joined a company they joined for life. Today however, employees change job as readily as they change their car! While seeking new opportunities can be great for employees, having your best talent head-hunted by another organization can be a nightmare for companies.
With keeping hold of your key talent becoming increasingly difficult it is more and more important for companies to look for new ways to keep their workers happy and working hard. One such way is to use equity compensation as a method of rewarding valuable employees
What is Equity Compensation?
Equity compensation is when an employee or an Executive Compensation is given a bonus that follows the progress of the company's stock. While many employers give their workers cash bonuses and pay rises, equity compensation is a relatively under-used method of rewarding employees and comes with some significant advantages for employers. The most common way to give equity compensation is through stock options but employees can also be given other forms of bonus such as restricted stock (which employees can sell once certain conditions have been met) and stock appreciation rights.
Equity compensation represents a form of ownership in the company and provides employees with a vested interest in making sure the company runs well - the better the company performs, the better their own stock gets! At a later stage your employees can choose to sell or transfer their stock, hopefully netting themselves a significant bonus. Since most employees don't cash in until they leave the company, you are giving a bonus that keeps on growing as long as they are working for you.
What is the problem with cash bonuses?
In most companies, a hard-working and successful employee will be given cash rewards which he will then spend on treating himself - perhaps a new television, or a holiday somewhere nice. Just a few weeks later though and the employee has almost forgotten the bonus! That television isn't so exciting anymore - and the holiday? Rapidly becoming a distant memory.
A cash bonus is nice at the time but is a one-off; the bonus and the motivation that come with it soon run out. While they are good for a time, your employees do start to take them for granted, they are no longer special but a regular factor in employment. When cash bonuses are expected and available in many companies they no longer serve as motivation to prevent someone leaving for another job.
Why do non-cash rewards motivate employees better?
Non-cash rewards such as equity compensation are a fantastic way to motivate employees! These types of bonuses directly link the financial well-being of your employees with the financial well-being of the company. As company shares go up and down the value of their bonus goes also fluctuates. When a team performs particularly well they can see how this not only helps the company but helps their own situation – this is a powerful incentive to keep individuals working hard! Daily tasks that may seem onerous and boring take on a new significance as they start to directly affect your employees. And when there is a bad quarter it will hit them where it hurts. They'll be motivated more than ever to strive for more.
The relative rarity of non-cash rewards mean that employees are highly motivated to stay at the company and progress their career there rather than seeking greener pastures. Employees frequently move job because they get the same types of bonus and pay elsewhere, they simply choose to go somewhere else as soon as they are offered that little bit more.
In conclusion, equity compensation benefits employers as well as employees. Employees feel more valued and gain a bonus that genuinely benefits them. Not only this, but the bonus that they gain when they choose to sell their stock is linked to how well the company does - the harder they work the more it is worth! This can encourage employees to work harder and stay longer in the company. Employers of course benefit from happier and harder working employees and as a result the whole company benefits. While you are giving away stock, you are also increasing the motivation for your employees to work harder thereby increasing the chances of your stock rising further in the future.