There are many concerns that keep business owners up at night and anxiety over losing key members of the company’s management team may rank near the top of the list. So how do you, as an owner, encourage employees to stay with your company?
There are many different types of equity compensation plans that can be narrowly focused to certain individuals within the company, typically key members of the leadership team. These equity compensation arrangements can take the form of stock option plans, stock grants, stock appreciation rights and phantom stock, among others. All of these plans give employees incentives to increase the value of the company and think strategically like an owner.
Stock purchase plans – Straightforward, simple plans in which identified individuals are allowed to purchase existing or newly-issued shares.
Stock grant plans – Stock is granted to an employee, generally for achieving key business results or performance metrics. The grant is viewed as a bonus, but is paid in stock.
Stock option plans – Employees are granted options to purchase shares of the company at a set price, and the employees themselves must come up with the funds when exercising their options. This plan does not grant actual stock, and thus the employees may not value options in the same proportion as the expense to the company.
Stock appreciation rights plans – Unsecured promise to pay compensation based on the appreciation in the value of a specified number of shares of the company stock. This type of plan is similar to an option plan, but with no need to purchase underlying stock at the exercise price. There is a potential cash drain on the company upon settlement; however, the liability can be settled in stock.
Phantom stock plans – Unsecured promise to pay compensation based on the full economic value of a specified number of shares of company stock. This type of plan is similar to a stock grant plan with restrictions, but the compensation is paid in cash rather than shares when fully vested.
Offering equity compensation plans to key management roles can serve a number of business goals and objectives:
- Recruit new talent
- Reward high performers for past contributions
- Conserve capital by using equity compensation rather than cash
- Provide an incentive for employees to reach future business objectives
- Share economic rewards with those who help build growth
- Encourage employees to think and act like owners
- Finance an employee buyout
Retaining employees and creating long-term commitment are challenging tasks for any owner. Equity compensation can be a great motivator for certain employees, but as with any business plan, your financial and legal advisors need to be consulted to help you understand all the advantages and disadvantages to implementation.
Original content written for the American City Business Journals (2016). View source webpage here.