13 Sep What Is Equity Compensation?
Equity compensation is a form of payment an organization can offer employees to partake in ownership of the firm. Equity pay is available in many different forms, including stock options, performance shares, and restricted stock. Employees who opt to receive equity pay can share in the company’s profits through appreciation.
Advantages & Disadvantages
As with every compensation decision you make, it’s critical to weigh the pros and cons of offering equity to determine whether it’s right for your company. Below, we list some pros and cons to help.
- Good for Startups: Mashable notes that companies just starting out can benefit from offering stock options to new hires because they may not have enough capital to secure key talent right away.
- Better Company Connection: Stock options can marry your financial interests with your employees’. When teams are literally invested in the performance of the company, they may become more committed and engaged at work, which can also help drive retention.
- Enhanced Total Rewards: Your ability to offer a comprehensive total rewards program can impact your ability to improve your employee value proposition. In today’s competitive job market, it’s important to use total rewards options and similar recruitment strategies to secure in-demand talent. Stock options could be more attractive to prospective employees, so offering them could make you a more competitive employer.
- Ownership Factors: Sometimes, founders go overboard when offering equity pay and wind up giving away too much ownership of the company. This can be avoided with strategic planning, however.
- Increased Complexity: The National Center for Employee Ownership (NCEO) states that 76% of employees who are eligible for stock options choose to receive them. This means that if you plan to offer equity pay to your teams, the majority of them will likely wind up taking them, which will create more work for your compensation department.
For many companies, the advantages of offering stock options tend to outweigh the cons. Plus, with a tool like compensation planning software, even the most complex compensation plans can become simplified. Thus, if you think offering equity pay could be a wise compensation option to support your overall organizational strategy, it’s certainly worth further consideration!
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