When it comes to attracting and retaining top talent, companies must provide competitive compensation packages that go beyond just cash. One way to do this is by offering equity compensation plans to employees and new applicants.
In this article, we'll explore what it is, the different types of plans, and how job seekers can evaluate and negotiate their stock-based plan offers. We'll also look at how HR decision makers and recruiters can present and offer stock options compensation during the hiring process and provide a checklist of must-dos for employers when offering equity compensation to potential new employees.
What is Equity Compensation?
Equity compensation is a form of compensation that gives employees an ownership stake in the company they work for. This can take the form of corporate stock, restricted stock units, or stock options. Equity compensation is becoming increasingly popular as a way for companies to attract talent, particularly in the tech industry, as well as for keeping employee engagement high.
How HR Can Present Equity Compensation Plans to Applicants
When presenting equity compensation packages to job aspirants, HR professionals should emphasize the benefits of receiving equity compensation and how it aligns with the company's long-term goals. HR should also explain the different types of equity compensation and how they work, including the vesting conditions, the FMV of the company's stock, and any tax consequences.
HR managers should also be transparent about the company's stock ownership structure and how much equity is being offered. Applicants should understand how many shares they will receive and how it compares to other employees at the company. HR should also explain how equity compensation can impact pay or cash compensation and how the company plans to balance both.
How Recruiters Can Offer Equity Compensation during the Hiring Process
Recruiters can offer equity compensation during the hiring process to attract top talent. When offering equity compensation, they should highlight the clear benefits of receiving equity compensation and how it can impact the candidate's long-term financial goals.
Moreover, recruiters should also communicate transparency when discussing the different types of equity compensation packages and how they work, including the vesting conditions and any tax implications.
Additionally, recruiters must provide candidates with information about the company's stock or its ownership structure and how much equity they will receive. Candidates should understand the amount of company shares they will receive and how it compares to other employees at the company. Recruiters should also be transparent about how providing equity compensation can impact ordinary pay a.k.a. cash compensation and how the company plans to balance both.
Points to Consider When Evaluating Equity Compensation Plans as a Job Seeker
As a job seeker, there are several points to consider when evaluating equity compensation plans. Here are some to get you started:
Vesting Schedule
This refers to the period of time over which equity vests. Some companies may have a one year cliff, which means that no shares vest until the employee has worked for the company for a year. Other companies may have staggered vesting, where shares vest over several years. It's important to understand the vesting schedule if it requires a one year cliff and how it aligns with your long-term goals.
Fair Market Value (FMV)
Another point to consider is the fair market value of the company stock. FMV is the price at which the stock would be sold in an arm's length transaction between a willing buyer and a willing seller. It's important to understand the FMV of the corporate stock and how it compares to the purchase price or exercise price of the equity compensation plan.
Corporate Stock Ownership Structure
This includes understanding who owns the company's shares and how much is available for future employees. It's important to understand the corporate stock ownership structure and how many stock-based units are being offered.
Tax Implications
Lastly, it's important to consider the tax implications of receiving equity compensation. Different types of equity compensation have different tax liabilities, so it's important to understand how each plan is taxed and how it will impact your overall tax liability.
How Job Applicants and Employers Can Negotiate Their Equity Plan Offers
When it comes to negotiating and providing equity plan offers, it's important for job applicants and employers to understand the value of equity compensation and how it compares to other compensation options. Job applicants should understand how much equity they will receive and how it compares to more employees at the firm. Employers should be transparent about the corporate shares ownership structure and how much is being offered.
Job applicants should also negotiate the vesting schedule and try to align it with their long-term goals. Employers should be willing to negotiate the vesting period to attract and retain talent. Job applicants and employers should also negotiate the FMV of the company stock and try to align it with the market rate.
Lastly, job applicants should consider negotiating the cash compensation package in addition to the equity compensation package. While stock incentives can provide long-term benefits, cash incentives can provide immediate financial security. Employers should be willing to balance both to attract and retain talent.
Common Types of Equity Compensation Plans for Job Seekers
There are several common types of equity compensation plans that companies use for labor acquisition. These include:
Restricted Stock Units (RSUs)
Restricted Stock Units (RSUs) grant employees a right to receive a share of the corporate stock, typically after a vesting date. This stock-based compensation has grown in popularity in recent years as they are less risky than stock options, which can become worthless if the stock price falls below the exercise price. Unlike stock options, RSUs do not require employees to purchase shares at a discount, and they are taxed at the fair market value of the corporate stock at the time of vesting.
Employee Stock Purchase Plans (ESPPs)
Employee Stock Purchase Plans (ESPPs) allow employees to purchase shares of the corporate stock at a discounted price. ESPPs typically have a vesting period of one year, after which employees can purchase stocks at the market rate or at a discount. ESPPs provide more employees with a way to invest in the firm they work for and can provide preferential tax treatment.
Stock Options
Stock options give employees the right to purchase company stock at a predetermined price, known as the exercise price. If the stock price increases above the exercise price, employees can purchase stocks at a lower price and sell them at a profit. However, if the stock price falls below the exercise price, the stock options become worthless. Stock options typically have a vesting period and an expiration date.
Phantom Stock
Phantom stock is a form of equity-based compensation that does not grant actual ownership in the company but instead provides employees with a cash payment equal to the increase in the company's share price over a period of time.
Checklist for Employers when Offering Equity Compensation during the Hiring Process
If you're an employer and you've decided to offer equity shares to applicants as part of their compensation package, it's important to follow certain steps to ensure that the process is transparent and fair. Here are some essential things you should consider:
Set clear expectations
Be sure to explain the equity-based compensation plan in detail to the job seeker. Outline the vesting date, the stock grant amount, the exercise price, and any other relevant details.
Provide context
Explain how equity-based compensation works and why it's an attractive option for your company. Provide market data on the value of equity-based incentives in your industry, and be transparent about your company valuation and stock performance.
Consult legal and financial experts
Equity compensation can be complex, so it's important to seek advice from professionals. Consult with a legal expert to ensure that your plan is compliant with relevant regulations and laws. Additionally, work with a financial advisor to create a tax-efficient equity-based compensation plan that benefits both the employee and the company.
Create an equitable distribution plan
Develop a clear and transparent process for distributing shares to new hires. Consider factors such as job level, performance, and tenure. Be sure to communicate this process to all new workers to avoid any confusion or misunderstandings.
Provide training and support
Educate new hires on stock-based compensation and how to manage their equity. This can include providing financial planning resources or hosting seminars on managing equity shares.
Consider employee engagement
Shares of equity can be powerful new tools for retaining employees, but it's important to keep them engaged. To ensure employee engagement, founders of startups and smaller companies should offer regular updates on the company's performance and the value of its equity-based compensation. Consider offering additional equity grants or promotions to top performers.
Regularly review and adjust
Plans should be reviewed on a regular basis to ensure they remain competitive and effective. Consider adjusting the compensation plan as the company grows or market conditions change.
Seamless Equity Management from Onboarding to Vesting
Equity compensation packages can be valuable new tools to attract talent and retain key employees, as well as for ensuring long-lasting employee engagement. By offering this, companies can provide job seekers with an ownership stake in the company, aligning their interests with the company's success. Additionally, it can provide preferential tax treatment and be more tax-efficient than cash pay incentives.
However, stock-based compensation can be complex and must be offered transparently and equitably. Employers must work with legal and financial experts to create compliant and tax-efficient equity plans.
When done right, equity-based compensation can be a clear benefit for both employees and employers. By following best practices and offering equity-based incentives transparently and equitably, startups and smaller companies can attract talent and drive long-term success.
That’s why at Upstock, we are keen on making it straightforward and efficient with our platform that easily onboard new employees so employers only need to view how much their shares have grown through flexible vesting periods. Reach out to us now to find out more about how Upstock benefits efficiency and makes it convenient for both employers and early employees!
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