A recent survey found that 93% of HR executives and 75% of employees believe equity compensation and stock ownership are the most effective ways to motivate employees.

How do equity incentives motivate employees?
Stock grants allow employees to participate in the growth of their company. By accepting the grant, they are not just employees - they become employee owners. That can generate a feeling of team spirit and boost employee morale. They are likely to be more productive and make valuable contributions to the company because their own success and wealth are linked to the company's success. 

Additionally, since most equity compensation is subject to vesting - a waiting process before employees can sell their stock, employees are incentivized to stay with the company longer. If they leave the company before hitting their vesting date, they might leave money on the table. 

That’s why equity can be considered a long-term incentive that focuses on future goals over a period of 3 years or more.

Cash bonuses vs Equity incentives
Cash bonuses are simple, easy-to-understand and have guaranteed value that doesn’t go underwater (i.e. an asset is worth less than it was paid for). While the value of cash is fixed, equity could significantly improve one’s financial wealth if the company stock performed well. This opportunity can help employees pay off their loans, achieve their dreams of traveling or purchasing a home etc. 

Cash can give employees a high level of motivation and excitement at the time that the incentive is released but it can run out quickly. So, cash may not be an ideal employee reward to prevent someone from leaving for another job. As discussed earlier, equity is a relatively long-term incentive thanks to its vesting feature.

In addition, giving out cash incentives can increase a company’s cash costs, and it could be a headache to a company that already has cash flow concerns. For those who have limited cash flow which is not uncommon among startups, equity compensation can help reduce the amount paid out in cash while you can still compete with large companies for top talent.

Equity incentives don’t work without robust communications
Even if you have a very well-designed equity compensation plan, it won’t be successful without a clear, purposeful education and communications plan. 

As an employer, it’s risky to assume every employee understands how equity compensation works, its pros and cons, etc. Without adequate education on equity, your employees may struggle to come up with extra money for an unexpected income tax bill.

A good communications program should be a two-way street – it is not only about throwing out information but also listening to your employees and acting accordingly. You should also consider using multiple channels such as town hall meetings, newsletters and videos to deliver your messaging because a single approach is not effective.  

Sometimes you need to try multiple times to find the right approaches to reach your audience with the right messaging, but the earlier you start your education and communications program, the earlier you and your employees can benefit from it.