Many companies grant equity compensation awards to employees and non-employees to give them an ownership interest in the company.
Equity awards are a popular type of compensation because companies can use equity awards to:
- Attract and retain talented employees.
- Incentivize employees' performance.
- Align the company’s goals & objectives with employee performance
- Motivate top executives to oversee and protect the company's long-term business.
Equity awards are usually long-term focused, unlike cash programs and bonuses, which are generally short-term in nature.
The Company should carefully consider the mix of equity and cash compensation for its employees
An Effective Equity-Based Compensation Plan are plans which are –
- Based on employee and company performance
- Designed to help attract and retain key talent
- Maximize employees’ after-tax benefit and minimize the company’s after-tax cost
- Use performance criteria over which employee has control, and
- Easy to administer and monitor
Types of Equity Compensation
There are many types of equity-based awards that companies grant to their employees, including:
- Restricted stock.
- Restricted stock units (RSUs).
- Stock options.
- Stock appreciation rights (SARs).
- Phantom stock.
- Performance awards.
These equity awards fall into two main buckets:
- Awards that give the employee the full value of the underlying shares at a particular point in time (restricted stock, RSUs, phantom stock, and performance awards).
- Awards that give the employee the appreciation in share value between two points in time (options and SARs).
Each award type has various benefits and drawbacks for companies and employees. For example, tax and accounting treatment varies depending on the type of award.
A company must carefully consider the advantages and disadvantages of each type of award as it relates to the company's business needs.
When designing an equity compensation program and granting equity awards, the company should consider which type of equity award best fits with the company's overall compensation strategy and business goals.
We have built our firm's reputation by working with owners to offer our experience that helps assure success. Beyond the planning phase, we have developed many of the services needed to help owners execute their plans. We can help develop incentive compensation plans which reflect your goals and unique situation, so the business obtains the best outcomes.
