Are you an HR manager struggling to explain equity compensation to employees? This guide will break down how employee equity works and best practices when communicating to your employees.
Equity compensation is becoming a popular offering among employers, and it’s no surprise why.
More than 77% of employees find equity compensation an essential benefit, and 37% consider it to be one of the main reasons why they took their current job. Given the impact of the Great Resignation, during which 41% of employees are considering leaving their jobs in 2021, it’s never been more critical for HR and People Operations teams to understand the ins and outs of equity compensation.
If you’re unfamiliar with this topic and aren’t sure where to start, you’ve come to the right place. We’ll give you an easy-to-understand overview of everything you need to know—from the benefits of this form of compensation to the most common types of equity.
How does employee equity compensation work?
First, let’s address a few fundamental questions about equity compensation.
What is employee equity compensation?
Investopedia defines equity compensation as:
“...non-cash pay that is offered to employees. Equity compensation may include options, restricted stock, and performance shares; all of these investment vehicles represent ownership in the firm for a company's employees.”
While equity is most commonly associated with private companies, such as startups, large public companies also offer equity.
We'll review the most common types of equity compensation later in the post.
Why is employee equity compensation popular?
Employee equity compensation is growing in popularity for many reasons. For employees, equity is valuable because it:
- Gives them a stake in the future success of the company
- Offers them an opportunity to diversify their finances
- Can lead to a potentially significant payoff if the company performs well over time
There are benefits for employers as well. For example, equity compensation can:
- Be a good option for companies with limited cash flow
- Motivate employees to perform better since they have a stake in the company
- Incentivize more employees to join and stay at your organization
Why is it essential for HR to understand employee equity compensation?
HR teams are the gatekeepers to every employee’s benefits and compensation package. By understanding the basics of equity compensation, you can have a positive impact in three core areas:
As we mentioned before, employees view equity compensation as a differentiator when deciding where they want to work. To attract top talent, you have to clearly explain the benefits of equity compensation and why your company’s offer is competitive. Having a basic understanding of equity also allows you to negotiate with candidates during the hiring process strategically.
To leverage equity compensation as a retention tool, you need to understand how your equity compensation works. For example, many employees are motivated to stay at their company until their options are fully vested. By helping them understand their vesting schedule, you can incentivize them to stay and reap the full benefits of their equity.
Providing your employees with a comprehensive education can have a significant impact on how they perceive their equity. A study found that employees who are more satisfied with the education they receive about their equity awards tend to value it more. Specifically, 80% of participants who receive personalized advice say they feel good about their financial situation, compared to 58% of those who did not receive such advice.
Tip: One of the most common questions our Certified Financial Planners™️ receive about employee equity has to do with taxes employees are responsible for when receiving restricted stock, stock options, and other awards. Learn more about how common forms of equity are taxed in the free eBook An HR Leader’s Guide To Understanding Employee Equity Compensation.
What is the most commonly used form of equity compensation for employees?
While there are many different types of equity compensation, we outlined some of the most common ones below.
There are two types of stock options that employers most commonly offer as equity compensation:
Incentive Stock Options (ISOs)
ISOs are a type of stock option that gives employees the right, within a designated timeframe, to buy a set number of their company’s shares at a predetermined price. ISOs can only be offered to employees.
Non-Qualified Stock Options (NSOs)
NSOs are a type of stock option that gives employees the right, within a designated timeframe, to buy a set number of their company’s shares at a predetermined price. NSOs can be offered to both employees and non-employees.
Employee Stock Purchase Plans (ESPPs)
ESPPs are a company-run program that offers employees the ability to purchase company stock at a discounted price—usually up to 15% off. To participate, employees contribute to the plan through payroll deductions. On the purchase date, the company uses the employee's accumulated funds to purchase stock at a discount.
Restricted Stock Units (RSUs)
RSUs offer employees a set number of shares of stock at a future date, upon the completion of a vesting schedule. RSUs are typically granted at larger, public companies. However, if they’re offered at private companies, RSUs will normally be subject to a “double-trigger” to fully vest (time and a liquidity event).
How do I help my employees understand their equity compensation?
Once you have a solid understanding of equity, it’s time to share that knowledge with the rest of your organization! Here are a few tactics to help your employees understand their equity compensation:
- Educate new hires during salary negotiations and the onboarding process
- Create a library of resources that includes articles, videos, and FAQs
- Hire an equity specialist on your team
- Invite financial speakers to speak and address questions about equity
- Partner with a financial wellness platform that offers equity guidance
If you’re looking for more comprehensive recommendations, check out our article on how to educate your employees on equity compensation.
Equity compensation will only continue to be a significant area of focus for HR and People Operations teams. Anticipating this need, Origin launched Equity Manager, a suite of tools designed to empower employees to make the most informed and confident decisions possible around their equity compensation. If you want to learn more about our financial wellness platform and equity compensation, feel free to schedule a meeting. We’d love to connect!