Equity Compensation: How to Design and Communicate Your Plan

When a prospective employee receives a job offer, complete with information about compensation and other benefits, equity compensation is sometimes included as part of their compensation package. Many employees are confused about what equity compensation actually is, and whether it truly provides enough benefits to convince them to accept the offer. Employers also often struggle to offer a genuinely appealing and helpful equity compensation package that will actually draw in top talent. 

So what is equity compensation, exactly? Equity compensation is a form of non-cash compensation that is usually delivered as shares in company stock, or an option to buy shares of company stock. Most companies that offer equity compensation do so with a vesting period, meaning that employees who are eligible to acquire certain asset classes provided by the employer within the specific period and ultimately have the full ownership once the vesting period ends. There are definite pros and cons to offering equity compensation for employees, but you can build a truly attractive and beneficial equity compensation package with some thought and effort. 

What Are the Benefits of Equity Compensation?

Many employees believe they would benefit more from receiving additional cash instead of equity options, but these employees may miss out on all of the potential benefits equity compensation can provide for them now and in the future. Some ways that equity compensation can benefit your company and your employees include:

Attracts High-Level Talent

It's no secret that many companies have struggled to attract and maintain quality employees over the past several years. When organizations run short-staffed, it can be impossible to maintain the quality of goods and service your customers expect. Plus, it's difficult to meet consumer demands, and that can make your company miss out on significant profit. 

The good news is that offering equity compensation plans to your employees can help your company attract and retain high-level talent. Employees these days are looking for employers that provide more than simply a salary and the cheapest benefits plans possible. In fact, many economic experts agree that raising wages alone is no longer sufficient to retain employees.  Employees are now seeking total compensation plans that include opportunities for growth, whether professional or financial, which can include compensation equity. 

Helps Cash-Poor Startups Appeal to the Right People

Startups often don't have much cash equity to dole out to their employees, but they can offer shares of the company that can make up for it. Startups with innovative ideas and excellent management have unlimited potential for growth, and prospective employees are likely to feel excited about the opportunity to grow with the company. 

Startups can greatly benefit from visionaries who can see the big picture and care more about the growth of the company than the cash salary they bring home. Clearly, offering fair pay is important, but startup equity compensation plans can help startups recruit the types of people that believe in the company and want to help it reach its full potential. 

Invests in Sustainable Growth

When your company offers transparent and attractive compensation for new and existing employees, they have significantly more reasons to stay with the company. This can prevent high rates of employee turnover, which results in ultra-high recruiting and training costs for the organization. When employees feel cared for by their company with a valuable equity compensation plan, they can focus more on the future of the company and the team as a whole instead of wondering what benefits they could receive at a different company.

Having a team of future-focused employees makes a company far more likely to succeed in the short term, and organizations with this kind of culture and early investment stand a much better chance at achieving sustainable growth in the long run. 

Motivates the Team in the Long Term

When employees own company equity options or shares, they often feel far more motivated to help the company operate efficiently and provide the best goods and services possible. When the company grows and succeeds, so do their financial portfolios thanks to their equity compensation. If your organization struggles to keep employees motivated in the long term, it may be worth adding equity compensation options to future and existing employees' benefits packages. 

How to Design Your Equity Compensation Plan

There are several potential shortfalls your company can fall into when offering a typical equity compensation startup plan. For starters, they can make your company's financial plans far more complex, and when plans aren't designed with enough foresight, they can leave employees' finances vulnerable. 

One of the most important factors to consider when designing your equity compensation plan is wage context. According to Rutgers University, employees that receive wages below the market average, yet receive compensation equity, are just as unsatisfied, uncommitted, and unmotivated as those who don't have compensation equity. In other words, when wages are too low, equity compensation does nothing to improve their perceptions and satisfaction with their workplace.

For this reason, you must consider the balance of wages and equity compensation in a holistic way, and ensure that you aren't putting too much or too little into either one. Equity compensation packages work best to motivate employees when they are paired with fair pay, regular feedback, training and professional growth opportunities, and an environment that makes employees feel as though they truly make a difference. 

Another important consideration is your vesting plan. Most financial experts agree that a diversified portfolio offers a reduced financial risk and potential for steady gains. Employees that receive large numbers of shares in a short amount of time may reduce the diversification in their portfolios and put them at financial risk if the company begins to lose value. A good rule of thumb is to keep any single asset as less than 10% of a portfolio, so it's important to plan your vesting schedule in a responsible way that mitigates your employees' risk. 

Communicating Your Equity Compensation Plan to Employees

One of the most significant challenges of offering an equity compensation plan is effectively communicating how they can benefit from it. Employers everywhere offer some incredible benefits that employees are only vaguely aware of or have no clue they exist, leaving employees feeling underappreciated and ready to look for another position. As such, it's imperative that you communicate effectively with your employees about the benefits you offer, including equity compensation plans, which can help them stay longer and feel much happier while working for your organization.

It can be difficult to explain equity compensation plans to employees, especially when they are overwhelmed with their other duties and onboarding processes. Fortunately, Welcome makes it easy to show your employees the total compensation they receive from your company in easily comprehensible visual and text format. Welcome breaks down all the benefits provided by your company and presents them in a dollar amount to show employees their true compensation amount. 

Our powerful and intuitive platform can show your employees how much they possess in vested and unvested shares, helping them see the value in sticking around to earn more over time. 

Equity Compensation Scenarios and Examples

When you create job offers, you can even provide multiple compensation scenario offers with Welcome to empower your new employees to choose which works better for them. Would they prefer to receive more cash, a larger sign on bonus, or more compensation equity? You can let them decide! 

Let’s take a look at two example compensation packages: 
  1. Compensation package 1: A yearly salary of $100,000, an annual bonus of approximately $10,000, and shares of the company estimated to be worth $20,000. 
  2. Compensation Package 2: A yearly salary of $90,000, an annual bonus of about $8,000, and shares of the company that are worth around $32,000. 

By allowing employees to choose between these two scenarios, your company will effectively pay the same amount, but your employees will feel more satisfied because they had a say in how they are compensated. 

Once you have had enough employees go through this decision-making process, Welcome's comprehensive analytics can analyze compensation data quickly to help you see which types of compensation packages are preferred by your employees. This information will help you make informed decisions about job offers and compensation packages moving forward, helping you continue to attract the best talent. 

Important Considerations for Equity Compensation

There are numerous upsides to offering equity compensation packages to your employees, though it can get complex when trying to design a plan that benefits your employees and the company as a whole in equal amounts. There are plenty of factors to consider when creating equity plans, but with careful thought and foresight, you can make your organization's equity compensation plan a major strength that makes recruiting and maintaining employees easier than ever. 

If you need help with designing compelling compensation packages, increasing job acceptance rates, and presenting what you offer to your candidates and employees, request a demo to see our product in action!

Written by