Offering stock options is a great way to provide additional compensation opportunities to employees. However, many candidates know little about the benefits of stock options and avoid them for fear of losing money. By providing your candidates and employees with extra information to better understand stock options, their choices, and how they work – you can improve your communication and better convey their value. Use these tips to effectively communicate employee stock options so your employees feel more comfortable with the concept.
Employee stock options (ESOs) are stock options that give employees the right to purchase a specific number of shares in the company at an agreed-upon price. The price is typically lower than market value, and the offer usually has an expiration date. While this is an accurate definition to describe ESOs, it's not a comprehensive explanation of the possible benefits your specific stock options can provide for your potential employees.
Begin by explaining how many shares are included in the offer and the amount the employee saves compared to the current market value (the spread). Outline the timeline of the ESO's vesting schedule and how delayed vesting can offer advantages. If you can share information about the company's growth and how shares have grown in value in the past, this can help provide an example of the value of the current offer. Explain whether the provided ESOs are qualified incentive stock options or non-qualified stock options, and how the resulting tax laws will affect profits or losses. Finally, make sure to clarify when the options expire, so your employees can have a clear idea of when to make a decision. Make sure your candidates have time to ask any relevant answers and they have all the information they need to fully understand the benefits provided by your company's ESOs.
When you're trying to recruit and retain employees with the promise of stock options, it may be tempting to create a completely positive image. This isn't a good idea. Even if you have the utmost confidence that your employees will gain significant value from company ESOs, there are potential risks. Failing to divulge the full story creates a culture of distrust within your organization. Describing the ins and outs of ESOs to your employees may include:
By sharing all the information about ESOs with your employees, you create a culture of trust. For employees, trust is one of the most important things a business can offer. Studies show that 52% of employees believe that ethical business practices are among the top foundational elements of trust and 31% believe that authenticity in corporate messaging and communications is a vital part of that trust.
When you build company/employee relationships on trust, your employees can see the value of investing in the company. Welcome’s Total Rewards provides employees with full transparency and visualization of their total compensation package. This tool also helps make it easier for your employees to understand their equity and what their financial future looks like.
Employees new to the stock market and the nature of investments might not have a firm understanding of the best ways to use ESOs. While the vesting schedule and expiration date offer some guidance, it's helpful to provide examples of how employees can use ESOs. Describe these three basic ways your employees can exercise their stock options.
Employees can view stocks as an immediate investment and buy them with cash. As the stock owner, employees will be responsible for paying commissions, fees, and taxes. Employees have a few different options to obtain the funds needed for their investment, which may include taking money from savings, rolling over proceeds from another stock sale, or borrowing from a brokerage account. Most often, employees don't need to purchase all the available shares at once because stocks vest over time.
If stocks gain value or maintain significant value over the original grant price when they become vested, employees can opt to buy and then sell them for an immediate profit. When selling immediately, employees can return purchase funds to savings or immediately pay off a brokerage account and use the profit for current necessities or another investment. In this type of situation, when the transaction is handled by the employer, it's possible for the employee to simply receive a check for the difference between the market price and the exercise price. If you have the ability to provide this option, your employees won't have to come up with the cash for investment.
Since employees will be responsible for commissions, fees, and taxes, taking care of these costs immediately can be an important issue. To immediately offset these costs, an employee can exercise their option to sell enough stock to cover immediate costs and keep the rest in the form of company stocks. By taking care of the investment cost early, the resulting profit will assume less risk.
Employees are likely aware of the risks involved when it comes to investing. However, when ESOs are an individual's first introduction to investing in stocks, learning how to mitigate potential risks can be even more of a challenge. Individuals who are aware that risks exist but don't understand the nature of the risks are less likely to recognize the potential benefits. You can help your employees navigate this unknown territory by offering as much information upfront as possible. Instead of underplaying potential risks, offer suggestions on how to mitigate risks. Useful suggestions include:
While you're attempting to win potential employees with stock options as part of a benefits package, it's important that ESOs aren't the only reason they're interested in the company. Being transparent with all the information they need to make an educated decision about the benefits of ESOs, sharing this type of information can help employees realize greater financial success from their investment, making it a win/win for all parties involved.
Learning about stock options can be complicated. Attempting to digest all the relevant information in the midst of considering a new role or change in career path can be an even bigger challenge. You can help candidates better understand stock options by providing them with additional resources and information.
Welcome helps the HR/People team easily present complex concepts like ESOs to candidates. With all the relevant information at their fingertips, employees can better understand their compensation through ESOs, their potential value of stock ownership, and their financial future. This knowledge empowers employees to make decisions to diversify their portfolios and exercise their options with confidence.
By offering stock options to your employees, you're providing valuable financial assets with the potential for increased financial success over time. When you share relevant information about company growth and how ESOs work, you're arming employees with the information they need to realize the best options available.
Welcome is on a mission to help teams build lasting relationships with candidates and employees. 95% of individuals don't understand equity. Our compensation scenarios allow you to communicate the total compensation of ESOs as part of a complete benefit and salary package. We help teams clearly communicate compensation to candidates and employees through our digital offer and total rewards experiences, powered by our real-time comp and equity data. If you're hiring and growing your team, please sign up for our demo to learn more.
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