Is offering equity compensation to employees still a good idea?

Thousands of companies – both public and private – offer equity compensation to employees. Every employer does so for a reason, but many may be reconsidering after a few painful months in the equity markets.

Starting questions

Before you make the decision to start, keep or drop an equity compensation plan, consider these questions.

• When measuring success for your equity comp plan, what are you trying to accomplish?
• Do you have an equity compensation strategy that is well-defined? Do you have a clear philosophy and goals?
• Will your strategy stand the test of time, or will external forces like market volatility cause you to revise your plan year after year?

How to build a measurable plan

If your answers to these questions suggest equity compensation is still right for your employees, you are ready to take three important steps.

First, define what success looks like. Equity compensation is a long game. Most awards vest—and here’s the key—over time. If one of your goals is to increase retention, for example, your plan should be enticing enough to weather the changing employment market.

Second, devise a plan strategy that is aligned with the mission and purpose of your organization. You will need to motivate and inspire employees. You can motivate them with a compelling value proposition for the plan, while inspiration can come from feeling their own value to your organization. As employees better understand how they contribute to your firm’s success as individuals, it will help them become happier and more engaged. You can increase retention by that alone.

Third, make sure your compensation strategy rewards employees who stay and ensure the plan’s structure can withstand uncontrollable fluctuations in the workforce and markets.

We’re seeing firms face this challenge right now. Over the last few months, many employers have been dealing with a combination of declining stock values and higher than usual employee departures due to “The Great Reshuffle.” For example, an equity plan that’s built primarily to attract workers who expect high stock prices and an early payoff might not be resilient in a down market. This can be especially true if employees’ equity comp is in a lock-up period while they watch the stock price drop, as we saw earlier this year among some newly public tech firms.

A once rich plan may not look so rich to employees, and they may seek greener pastures. Your plan’s metrics and its types of awards need to be flexible enough to handle such market fluctuations so that employees, both new and tenured, see a reason to stay.

Offering the same yardstick to measure every equity comp plan is just not practical. But if you keep these three foundational values in mind when building your plan, measuring success becomes a lot easier and more consistent over time.

Amy Reback is head of Schwab Stock Plan Services.

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Disclosures

Schwab Stock Plan Services provides equity compensation plan services and other financial services to corporations and employees through Charles Schwab & Co., Inc. (“Schwab”) Member SIPC. Schwab, a registered broker-dealer, offers brokerage and custody services to its customers. 0722-26BU