Equity compensation can be used to attract and retain the best people for your business.
Last month, I wrote about positioning your company to attract and keep top performers. look at this Equity compensation is a great way to achieve both.
Performance pay has become a critical factor in keeping top talent; combine it with a sense of ownership and a stake in the future of the business, and you've got a powerful set of incentives.
That is what equity does. The basic theory behind equity compensation is simple: generously pay your people in the future, with the financial value they help create, and make it very expensive for them to leave. This article will look at three different ways to achieve this.
Why use equity and not some other variable compensation such as performance bonuses or profit sharing? Bonus and profit-sharing plans are more likely to reflect past performance than future efforts, and that's where you want people to focus. Once paid, they cannot be increased by any amount of hard work, creativity or imagination. Bonuses and profit sharing are typically one-time payouts, which in today's what-have-you-done-for-me-lately atmosphere are quickly forgotten. Profit sharing is only possible if there are profits. Bonuses require cash. Both (or either) of these items may be scarce in a growing business.
Equity addresses these shortcomings. Equity is a bonus that never stops. Equity compensation will likely increase in value over time. Equity acknowledges your employee's past contribution, but its real payoff is for work still to be done - and your people have to stay around to reap the rewards. In real terms, the current cost of equity compensation is cheap, especially relative to the loyalty it can purchase. Since no money is exchanged at the time of an equity bonus, it can be used as a reward, even if you are in a cash-strapped company.
There are other plusses to equity. Especially if your business is likely to go public or be acquired, equity helps top talent choose between your smaller company and job offers from larger, well-heeled public companies. Also, equity highlights and underscores the common interests between your company's owners and the "rank-and-file", and helps top performers feel like the business is theirs.
Outright Stock Grantsare simple to implement. Your company grants a key employee a specific number of shares, the value of which is the total company value divided by the number of outstanding shares. That's it. Shares are more tangible than any other type of investment. Stock makes your key people feel like owners, and when people really see themselves as shareholders they rarely want to leave.