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    Two Truths about Establishing an Equity Compensation Plan That Are Imperative to Its Success

    [fa icon="calendar"] Dec 20, 2017 2:12:27 PM / by Kevin Long

    Kevin Long

    Two Truths About Establishing an Equity Compensation Plan That Are Imperative to Its Success.jpgWe hear over and over from our clients and referral sources looking for solutions to long-term equity incentive compensation planning "I'd like to compensate my employees in stock to incentivize them and motivate them to help grow the company." This is not just limited to our practice in the Silicon Valley business community, it’s for middle market companies everywhere.

    Our response is always the same. The truths are that:

    1. Employees have their own motivations.
    2. You can't simply roll out an equity incentive plan and expect it to be well-received by all the employees you think want equity compensation. 

    On the first point, a number of studies have shown and books have been written on the issue of what motivates employees. I learned 30 years ago in one of the first trainings I received when working on the compensation and benefits team for a big eight accounting firm, that employees have their own motivators and motivations. The challenge is finding the employee's motivations and appealing to those motivations with something meaningful that aligns their objectives with the objectives of the business.

    On the second point, there are various equity and pseudo-equity benefit plans that are available. Each of these can be designed and presented in numerous ways in an attempt to communicate the meaning of and the value of the opportunity for equity participation or sharing. Unfortunately, these employees with different motivations, different career objectives and different personalities will react to a rollout of any one of these benefit plans differently. This presents numerous variables on either side of the equation, meaning that the employer’s outputs to the calculus are at best a guessing game.

    So what should you do? Well, to the extent that the company has very few individuals targeted for equity sharing or participation, it could be a fairly straightforward exercise to have the critical conversations to find out what is needed to move those key people and the business forward. However, beyond a couple of employees in upper management, we believe it is critical to first assess your workforce to understand what you're dealing with, and assess whether or not equity sharing and participation is going to be properly received. It's only after taking one or both of these steps that you materially increase the possibility of designing the right equity program.

    For assessing the workforce, we have strategic partners specialized in the organizational behavior aspects of the workforce. We urgently encourage our clients to get the right tools and advisors to assess their workforce, and determine what those motivations are that they need to align with and appeal to.

    In the area of receptiveness to equity compensation, we jointly developed a tool with the National Center for Employee Ownership (NCEO) that we recommend in most every circumstance. We call it an equity readiness or equity interest survey. It allows an employer to survey and assess what equity ownership of participation means to its workforce. Not everybody aspires to be a controlling interest shareholder, and not all employees understand what it means to own stock or equity interests in an LLC or LLP, just as an example.  The survey and the analysis of the data gathered can be very telling.  If the survey is transparent, tailored discussions are a possibility.  If the survey is blind or “opaque” (more likely in a larger company), the data may still be relevant if it is tailored to the demographics of the population being surveyed.  It is amazingly cost effective to do.

    Both exercises can be eye-opening. They greatly minimize the number of variables in the equation of equity plan design and help ensure a program that appeals to the right people for the right reasons, and for the right objectives in the right amounts of the right kind of equity participation.

    After all, this is the primary objective isn't it? Armed with this type of intelligence,  the lawyers can give you what you need, and what your employees want, to help make your business more successful.  And don’t think of your employees like donkeys – there are some race horses in there that just need some room to run. Contact us if you have questions about your current benefit plan.  

    Kevin Long

    Written by Kevin Long

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