Equity Compensation

 We generally hear about offering equity compensation for start-ups. New businesses are typically strapped for cash, so this option not only pays for the employees’ skill set, but also their investment and interest in making it a successful business. It might be even more relevant in financial downturns with a company for whom an employee has invested it’s time and already built its trust. During a financial downturn, the company will likely be down in price so riding the wave back up once things rebound is a nice added bonus.

Ownership Compensation

Schedules & Equity Options

Vesting schedules, incentive stock options (ISOs), restricted stock units (RSUs) are a few of the structure options for equity payments.

According to NCEO (National Center for Employee Ownership), there are five basic kinds of individual equity:

1.   Stock options,
2.   Restricted stock and restricted stock units,
3.   Stock appreciation rights,
4.   Phantom stock, and
5. employee stock purchase plans.The NCEO goes into more depth of each of these options in this web article.

   Pros & Cons

   Equity in lieu of salary is not always in the best interest of an employee, it’s a risky one because companies can fail. However, the risk may be worth it if the company shows potential for growth. Take Silicon Valley for example, the employees who signed up for equity for this start-up became millionaires. It’s examples like Silicon Valley, that a company can focus on when explaining the pros to the risks they take when taking ownership over salary. Not to mention, during a financial downturn when the company needs to keep money fluid, the employee is doing the business a great service. When an employee feels like they are contributing in a more meaningful way it may make hopping on board with the idea easier.

   One downside of equity-based compensation to consider, as given by RH Smith, is that when you “motivate with a focus on short-term profits to meet short-run analysts expectations can destroy long-run shareholder value…a contribution to corporate scandals,” some would say.

   Of course, you’ll have a financial professional set-up the option of your choice and help you weigh the pros and cons to equity in lieu of salary to find what would work best for your business. When you do, you’ll also have information drawn up for your employees that goes in depth about what you are offering, why and discusses tax consequences to consider for down the road planning and exercising of equity options.