Types of Employee Equity Compensation Plans

Companies use such a practice as equity compensation for employees. Equity compensation is a way of paying employees when a company offers them equity instead of the salary.

There are various types of equity compensation, but the most commonly used ones are, for example, company stock or restricted stock units (RSUs). In particular, most financial analysts often refer to the allocation of shares in a business company as compensation to employees for their responsible attitude and quality work.

However, employees who hear about such an initiative immediately turn from the first reaction of happiness and joy to the question “What should I do?”. This is not surprising, because not everyone will start to understand this topic on their own until a person finds himself in a relevant situation. Nevertheless, knowing more about equity compensation can be extremely useful. 

In particular, deeper knowledge of this issue can help to understand the essence of compensation as an accessible practice in general. Therefore, in this article, we will try to explain in detail what is equity compensation, what types of compensation are available, and the specifics of acquiring ownership.

Employee Equity Plans

Many global companies are increasingly practicing such a way of encouraging employees as compensation. In particular, according to the Morgan Stanley State of Equity Plan Management report for 2022, the key findings of which were published by Bloomberg, “…Companies Reimagining Equity Compensation to Compete for Talent Amid ‘Great Resignation'”. 

For example, the main findings of the study were that “…nearly one in three (32%) HR decision-makers indicated the number one goal for offering equity compensation is to attract and retain talent.” And numerous companies are increasingly setting a strategic goal of expanding employee access to equity. After all, it is this goal that helps to conduct proper personnel management.

Employee equity plans should begin with a full understanding of the functioning of this system and its concept. After all, the general principle of equity compensation is to properly align the interests of the owner, employees, and the company’s financial position. 

Equity compensation plans directly depend on the relationship between team performance and the financial capabilities of the business.

Types of Employee Equity Compensation

Today, there are a different compensation types. Each of them will differ in the peculiarities of legal appropriation and opportunities to get different benefits. Therefore, companies should consider which of the options will be optimal.

The most common types of equity compensation are as follows:

  • Stock compensation plans: such stock options are special benefits that allow employees to purchase a few shares at a clearly defined price. In particular, the Yahoo Finance platform division distinguishes between 2 forms of options: nonqualified stock options (NQSOs, widely available) and incentive stock options (ISOs, relevant for company executives).
  • Restricted Stock Unit Grants: or RSUs. Employees can receive such shares if they have been working in the company for a long time (as a format of rewarding their loyalty).
  • Employee stock purchase plan: provides an opportunity to purchase shares at a lower price through salary deductions. This way, employees can accumulate more securities and sell them at higher prices later.

Another interesting option for equity compensation is mentioned in the Indeed blog. It is about restricted stock or restricted stock units (RSUs). This is a type of compensation that grants a certain number of shares to employees for a certain period to achieve set performance goals.

Vesting: The Key Milestone

Depending on the company’s business practices and internal features, managers usually do not issue employee shares immediately upon hiring. However, over time, they will also have the opportunity to purchase shares or receive other forms of compensation. 

The vesting period is set out in specially defined agreements. The date on which stock options are awarded to an employee is called the vesting date. According to the agreements, employees receive shares within a specified time. So, for example, if an employee has a 4-year vesting period, he or she will receive a certain percentage in a year. 

Also, the date of acquisition of share packages or other compensation may be set for a period during which the employee must perform his or her work in the best way possible. For example, the company may provide an opportunity to purchase shares after 3 years of dedicated service. These conditions will be unique to each organization.

Conclusions: Navigating Employee Equity Compensation

In general, all types of compensation are aimed at motivating employees not to change jobs, making them feel important, and providing them with some financial benefits. The main advantage of receiving employee compensation will also be how fast the organization is growing, entering new markets, and increasing its sales, audience, or other statistical indicators. After all, shares in such a business with a progressive trend will bring more benefits and profits.