The Answer To Hiring And Retention Woes May Lie In Equity Compensation Programs

Ensure the plan aligns with your business goals and the wants and needs of your employees

The shift to hybrid work environments and the tight labor market has given employees a new outlook on workplace offerings: we are seeing more employees prioritize compensation-related benefits over culture-related perks. To remain competitive and address these evolving workforce demands, employers are raising salaries. Recent data from the Bureau of Labor Statistics showed that as of August 2021, payrolls rose nationally at the fastest pace in almost a year.

While salary raises are an effective tactic, companies should consider other compensation offerings to recruit and retain top talent during and beyond the Great Resignation. One successful strategy is equity compensation plans, which align the interests of employees with the overall goals of the company. There are a variety of equity compensation plans companies can offer, such as restricted stock awards, in which shares vest on a time and/or performance-based vesting schedule; and employee stock purchase plans (ESPP), in which shares can be purchased at a discounted rate, usually through payroll deductions.

Equity compensation plans provide employees a direct correlation between their personal and the company’s success, fostering a strong sense of ownership, boosting work ethic, and helping build long-term wealth.

For example, with Employee Stock Purchase Plans (ESPP), employees can purchase company shares at a discount, often at 5%–15% of the fair market value, which not only creates equity ownership but also  can provide additional return on investments. An ESPP with a 15% discount effectively yields an immediate 17.6% return on investment. . Fifty-one percent of workers who have an equity compensation plan intend to use the money to help fund retirement, according to a 2020 survey of 1,000 equity compensation plan participants by Schwab Stock Plan Services.

The Schwab survey also revealed that more than three-quarters of respondents (77%) said equity compensation was a very attractive benefit. An increasing number (37%, up from 28% in 2019) consider it the main reason or one of the main reasons they took their current job. Millennial respondents were the most likely to identify equity compensation as the main reason or one of the main reasons they chose their current employer (53%).

It is normal for a business to spend 40 – 80% solely on employee salaries and benefits, and it can cost up to 213% of an annual salary to replace executive positions within a company. Considering those statistics, it makes sense why companies are investing in benefits that can be leveraged as retention tools. Equity compensation programs improve employee morale, which directly affects turnover and retention—all of which contribute to overall business success.

Equity compensation plans are also attractive to employers due to the tax and financial benefits, creating a dollar-for-dollar deduction for qualifying equity compensation. Being a non-cash form of compensation, companies can leverage this type of compensation without straining their cash flow—a key consideration for businesses like start-ups that have less cash on their balance sheet. The significant savings created by this approach allows for reinvestment of cash in other operations.

There are a variety of models that business leaders should assess based on their priorities to develop an equity compensation program. For example, if a focus is attracting and retaining employees, the organization should consider offering a full-value award. The benefit of a full-value award is units that vest will generally have value, without a limit or threshold, as long as there is value in the corresponding equity interest. If a company’s focus is motivating employees to meet their performance goals, consider performance-based awards.

Whichever route you take, it is important not to overcomplicate the program. Employees do not value something that they do not understand. One way to help with this is by looking for an administrative platform for the program that is easy to navigate. When employees have access to a dashboard where they can visually see the value being distributed, they are more likely to participate in and appreciate the offering.  

It is also crucial to have a transparent communication and education strategy for the equity compensation plans, so employees know and understand their options. One way to do this is to brand the program so employees have a visual cue to pay attention whenever they receive communications related to comp plans. For example, at Brown & Brown, we created a graphic that features our company mascot on a piggy bank. This visual branding is consistently included in all announcements related to our financial compensation offerings, such as stock programs and 401K. Our team receives dozens of emails every day, and we have received great feedback that the piggy bank helps our communications stand out from the clutter.

Most importantly, when designing an equity compensation plan, you should ensure the plan aligns with your business goals and the wants and needs of your employees. This alignment can be achieved by conducting your own research with employees, stakeholders and executives through surveys or other outreach methods. The results should help guide you as you tailor an integrated compensation plan.

In the end, a thoughtful and aligned equity compensation program should enhance your company’s culture, drive interest from top talent, and ultimately impact your long-term success.