?As the Great Resignation continues to boost turnover rates, more employers are trying new tactics to keep workers on board and woo back those who have left. Flexible scheduling, higher pay and more-robust benefits packages are all having their day in the sun. Now, some companies are considering equity compensation programs, in which employees are rewarded with shares in the business.
According to The State of Equity Plan Management 2022 Report from Morgan Stanley at Work, offering employees an equity compensation program has become the second-most popular method among companies with at least 100 employees to reduce turnover and attract new hires, second only to providing higher pay.
“Business leaders placed equity compensation at the important intersection of talent acquisition, company culture and long-term growth strategies,” the report stated. “Furthermore, 80 percent of equity leaders said they believe the importance of equity in compensation programs will increase over the next five years.”
Finding and keeping talented workers is certainly why Ensono, a Chicago technology company with more than 2,900 employees, launched its equity compensation program.
“By giving our employees equity through the Ensono Associate Equity Program, we’re able to not only attract new pools of talent, but [also] keep existing employees engaged at the organization and reward them for their dedication and hard work,” said Meredith Graham, chief people officer.
In addition to improving recruiting and retention, an equity program can also increase employee motivation, which contributes to the company’s productivity and bottom line, said Mike Wendt, executive director of HR operations and compensation at Ally Financial, a bank holding company headquartered in Detroit with 10,500 employees.
“Ally felt that the empowerment that comes with an ownership mentality is something all employees could benefit from,” Wendt said. “In fact, it’s great for business, and our results and growth over the past several years are a testament to this, but it’s also great for employee morale and our culture.”
Small employers are offering equity stakes as well. At Illuminate Labs, a dietary supplement company with seven team members in Northampton, Mass., President Calloway Cook said he “wanted to incentivize team members to buy in to the long-term vision of the company. Everyone in a capitalist market responds to economic incentives, and employees are no different.”
Cook said the plan has gone as expected. “All of our team members have responded very favorably to our stock option and earned equity compensation plan. We’re quite generous with the percentages, and everyone on the team knows that if we achieve our strategic goals, there’s likely a big payout for all of us,” he said.
For companies ready to explore adding an equity compensation program, here are the steps needed to kick off that effort.
Consult With a Lawyer
Experts say it’s critical to start by getting legal guidance when creating a new program.
“Consult with a corporate lawyer to draw up the contracts for stock options,” Cook said. “Too many startups fail to do this and produce their own contracts, which can cause legal headaches down the road.”Illuminate Labs hired a law firm to develop a stock options contract, and the company uses it as a template for all future stock options contracts.
Develop Exact Requirements
Before implementing a program, research what other companies offer, and then decide if your planned approach is competitive. For instance, will you immediately offer shares to new employees to get them to join or require a waiting period? At Illuminate Labs, employees receive their first stock options after six months of employment, Cook said.
“This approach helps protect the company because it would be illogical to grant a new employee stock options immediately upon joining,” he said. “If they quit the next week, they would own a share of a valuable business without having contributed to it.”
At Ally, which started its program in 2020, employees receive a yearly award that consists of 100 Ally shares, with a three-year cliff vesting schedule. “This means that Ally employees will be entitled to the full award three years from the grant date as long as they are still an active Ally employee,” Wendt said. “Any dividends paid during the vesting period will accrue and will be paid out when the shares vest.”
At CircleIt, a tech startup in Chicago with 31 employees, 20 percent of outstanding shares have been allocated to an employee equity pool, said Art Shaikh, founder and CEO. “Every employee we hire gets shares from this pool based on roles and responsibilities they take on,” he said. “We also provide regular performance bonuses in equity.”
Clearly Communicate the Details
Employees need to know the specifics of the program. Simply telling them about it during onboarding meetings isn’t enough, said Ensono’s Graham. “It’s necessary to have clear communication with your employees about the details of the program, including its benefits but also its requirements,” she said.
“It’s important to tie how their contribution to the company will help the program succeed and ultimately achieve its goal—in this case, in the form of a payout for all,” Graham continued. “Every employee has an impact on customer satisfaction, and they should understand that the hard work they put in will benefit them in the long run.”
Exercise Inclusivity
Some companies will only offer shares to salaried, full-time workers. However, at Ally Financial, the program is more inclusive, Wendt noted.
“If a company is going to consider an equity grant or providing an employee stock purchasing program, they should do it in a way that is inclusive of all employees—both salaried and hourly workers, across locations and levels, in a way that adheres to the law,” he said.
Offer Investment Training
Not all employees will understand what equity compensation is or how they can benefit from it. Be sure to educate staff on the program, as well as on a range of other aspects of financial wellness, so they feel more empowered in their financial lives, Wendt advised.
“When a company provides economic boosters and awards to employees, it also should provide them with ongoing financial education so they can learn about investing, managing their money and saving for the future,” he explained. “It’s an effort in economic upward mobility as well as a token of thanks and recognition of success.”
Kylie Ora Lobell is a freelance writer based in Los Angeles.