Equity incentive plans: What are they and how do you offer them?
As the economy trends downwards, many People Ops leaders are facing budget cuts. Attracting and retaining skilled workers is a challenge when cash is tight and you can't increase salaries. How can you continue to offer the types of competitive packages that will keep your current employees from jumping ship—while also attracting top talent? Equity incentive plans are one valuable recruitment tool you can use.
What is an equity incentive plan?
An equity incentive program offers an employee shares of the company they work for. Shares can be awarded through stock options, stocks, warrants, or bonds. Stock options are the most common and recognizable form of employee equity.
Employee equity incentive plans are popular recruitment tools for startups that may not have a steady cash flow or great profits as they're still in the early stages. They can also be useful for People Operations leaders who are grappling with tight budgets.
Why offering an incentive plan is beneficial to both you and prospective employees
Helps companies save cash
Salaries are among the biggest expenses companies face. Depending on the sector, companies can spend from 40 to 80% of their operating budgets on salaries. Equity incentive plans allow companies to conserve cash by offering lower salaries in exchange for equity. While workers still get a monthly salary, they may accept less pay than usual because they recognize the value of having equity in the company instead.
Reduces employee turnover
Employee equity incentive plans are subject to vesting schedules, or timelines for stock ownership. Depending on the terms of the vesting schedule, an employee may have to continue working for the company for anywhere from three to six years to get the full benefits. This encourages workers to stay and grow with the company.
Offers a new way to recruit the best
Equity sharing has become increasingly popular over the past decade, thanks in part to the prevalence of startups offering employees, even entry-level ones, shares. Some job seekers may actively seek these types of roles and compensation packages. People Ops leaders can keep up with the competition and ensure they are still able to recruit the best workers through well-structured equity offers.
Keeps your business competitive
Unemployment rates remain low in 2022, and many sectors are struggling to find the talent they need to maintain optimal operations. It's a job seeker's marketplace at the moment. Equity incentive programs can help companies stay competitive, especially when pitted against larger corporations with bigger salary budgets. For example, a small startup may not be able to offer a large corporate salary—but it can offer equity.
Opens a new path for employee gains
Workers benefit from equity incentive plans as well, making financial gains as the value of their equity increases.
Options are a common equity incentive plan example. A stock option is the right to buy a company's stock at a predefined price. That price is usually equal to the fair market value of the stock at the time that the option is granted.
If an employee gets options at that rate, and the company's stock later grows in value, the employee can gain financially.
Making equity incentive plans international
Employee equity incentive plans have clear benefits. That said, setting them up can be—to put it bluntly—a pain.
You have to determine what type of equity to offer, such as restricted stock versus stock options, what the protocols for issuing equity incentives are, and the tax implications.
This guide to creating an employment contract with equity covers all the essential points.
You also have to ensure that any equity issued is in compliance with United States securities law. Plus, you need to ensure that employees are paying the requisite taxes on equity.
The situation gets even more complicated when you're offering equity to employees based in different countries. Regulations and tax structures governing equity vary according to location, so it's important to do your research.
Oyster can help. Oyster's new equity assessment tool provides country-specific information about the cost, tax obligations, and compliance requirements that come with providing equity like stock options, restricted stock units, and cash plans to employees.
People Operations leaders can use this tool to easily understand the feasibility of providing various types of equity across multiple countries. This can help you make smarter decisions about your company's global compensation policy.
This is just one of the many tools Oyster offers companies to help simplify global employment. You may also benefit from the global health benefits plan database, which helps you find the perfect health plan across 180+ countries.
Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.
Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.