Why Equity Compensation Works

By:
Graham McConnell
Why Equity Compensation Works

The impact of the past several weeks has shifted how businesses will operate in order to save their bottom line. 

Companies have rapidly transformed the way they distribute products, communicate with customers, and collaborate with their employees. As business owners continue to navigate the daily demand of our new normal, it is difficult to imagine what the future of their compensation plans may look like.

That future includes hiring/re-hiring employees, investing in new tools and technology, and being competitive in a new world. One way businesses are preparing for a more stable bottom line is by considering equity compensation.

The practice of offering equity to employees is common practice in Silicon Valley, as determined startups aim to attract talent and preserve cash. But the idea that equity compensation is limited to these smaller-to medium-sized businesses, or large public enterprises, is going by the wayside.

An equity compensation plan allows businesses to: 

  1. Preserve capital by lowering cash compensation.
  2. Provide incentives for employees to perform and align with company goals.
  3. Compete for talent in the marketplace.

More and more companies across the country are implementing equity compensation plans, seeing it as a best practice and following the trend. Land O’Lakes, Ocean Spray, and Publix, three large and successful companies, all implement an employee compensation plan. They see it as essential to their growth and success.

Equity compensation helps them to attract strong candidates for employment. Employees invest in their futures through a commitment to hard work in the hopes that their individual motivation leads to equity that will come to fruition.  And now, there are SaaS platforms like Nth Round available to distribute and manage equity compensation.

Types of Equity Compensation Plans

A more traditional form of employee ownership is an ESOP (employee stock ownership plans). For ESOP offerings, demographics give us a sense of who is dominating the practice in the United States. California has over 800 ESOPs, while the Midwest has over 2,000 ESOPS. These numbers prove the growth of companies that see these offerings as added value to their companies.

For smaller businesses, other options besides ESOPS exist to allow for employee ownership. The Finance Act of 2014 attracted more privately-owned businesses to employee ownership trusts as a viable option to enhance their company performance. Restricted Stock, RSUs, SARs, MIPs, and phantom stock are all viable options but with varying application and tax implications.

What exactly is the value of using equity compensation? 

Harvard Business School emphatically supports the idea. Baby boomers, who are now within retirement age, create opportunities for privately-owned companies to attract a fresh group of the best employees. The research for adding an equity option speaks for itself: a Rutgers study found that converting to worker and employee ownership boosts profits by as much as 14%. A privately held company that either starts with or considers this transition ensures an increase in productivity and value to the company.

Considering this option increases opportunities for your employees, giving them the chance to increase their values and that of the company, thereby creating a positive workspace that makes for happy, committed employees. These employees have chosen a company in which by investing in themselves, they invest in the success of their company. Nth Round follows this practice, offering employees equity when hired.

When job seekers consider an offer for employment, often companies in which they are interested all provide an exciting opportunity for their future. So how then might a person consider accepting the best offer? Oftentimes the final decision when accepting an offer comes down to two things: salary and benefits packages. Recently, companies have included equity in their benefits packages, enticing employees to own a share in the company in hopes of boosting employee morale, and ambition, to ensure the success of the company overall. Today, it is estimated that about 9 million employees participate in plans that provide stock options or other individual equity to most or all employees.

For more insight, visit the free equity navigator tool to learn more about equity compensation options that best suit your business.

Graham McConnell

Graham is an entrepreneur with strong passions in finance and technology, especially software development, cyber-security, and blockchain protocols. After stints at TA Instruments and Savana, Inc., Graham joined Relay Network, where he served as product owner, managing priorities for a team of twelve software developers and test engineers. Drawn to finance, Graham then joined AJO Partners ($25B AUM), a top-tier quantitative investment firm, where he oversaw software development. Today Graham runs all aspects of Nth Round operations: from product development, to sales and marketing, to customer support.