There is more to equity compensation than just giving your employees stock in the company. In this podcast episode, Kevin Long addresses common overbroad assumptions about equity compensation and how an equity readiness survey helps you determine whether an equity compensation plan is right for your business.
Speaking of benefits, this is Kevin Long of Employee Benefits Law Group. Let them eat stock, I say. It seems equity compensation in private companies is all the rage. I must admit that I didn’t think that I would ever see this many middle market, private companies, even small ones, want to offer stock compensation as an incentive. Well, when the clients come in, they have no idea that there are many, many more plans than what they assumed are available. They certainly have no idea that there are so many design options within each type of plan. They’re always intrigued with all those variables, but usually, they get overloaded with choices and become confused as to which plans and designs are best for their employees to meet their objectives.
Are Your Assumptions Valid?
I’m always intrigued by what they assume. I find that there are three things that they uniformly bring to mind. First, they assume that employees want stock, typically based on anecdotal information or by talking to a small number of employees, or based on what they read about in the outside world from the business community pundits.
Second, they think that what they ask for in terms of plan design will be embraced by the employees and embraced perhaps by all of their workforce. Some employers, however, think that employees may embrace it more because they’re key employees. And of course, in client situations like that, they may want to just offer equity to key employees.
Third and pervasively, they think that taking action will help create a united productivity enhancement within the company. This is what they’re reading about. They believe that today’s generation and those companies who are looking at succession will take the stock incentive and run with it.
But, none of these assumptions are universally true. Truth varies by size of the company, the industry that they’re in, the tenure of the employees, what their job descriptions and responsibilities are, and whether or not they have an appetite for investment risk. Oh, and finally, whether or not it comes out of their wages or whether the company’s just going to give it to them.
Even if they know whether any of these assumptions are true in their workplace, isn’t it still like throwing darts to design a plan based on these assumptions? In most cases, the plan is designed by the board based on what they’re willing to give to the employees. They’re throwing darts blindfolded.
My first admonishment to them is, don’t assume that any of this is true or any of it will work. Find a way to assess whether or not they’re true for their company. I refer to this as asking, are the employees “ready” for equity ownership? Some are, some might get there, and some will never be. So how do you evaluate this? How do you find out if you’re installing a broad-based equity program? Quite frankly, it’s necessary.
We don’t recommend you do it alone because invariably you’ll ask the wrong questions. You’ll ask the wrong people and you won’t take the time to ask enough of them. If you’re installing just an executive benefit plan, it’ll be much easier.
An Equity Readiness Survey
The best tool that our clients have found for assessing viability and the importance to the employees and the potential effectiveness of a broad-based plan is to commission an Equity Readiness Survey from the National Center for Employee Ownership, the NCEO. If it’s an executives-only plan, there are other tools. This survey was designed some years ago for one of our clients, a small company that was looking at succession. It was an engineering firm. There was an assumption that all engineers ultimately want to own their companies because they typically have a vision for their careers. Industry publications were indicating that this was true. As it turned out, almost none of the employees were interested in a broad-based program. Most were extremely risk averse and did not want the responsibility of owning the company.
This type of survey and the NCEO survey, in particular, will examine the underlying conditions and employee motivations, such as the culture of the company, how employees currently feel about the company and their jobs, and whether the board’s selection and design might be something that aligns them with the company and enhances their feelings about the company.
You must know what their feelings about the company are. For example, do they view it as a place for advancement? Do they view it as a place to stay forever? How do they feel about their ability presently to affect the performance of the company and whether stock ownership will affect that? The survey can evaluate what goes into the types of plans or a certain type of plan that management and the board thinks will work, including how it might be funded. The queries should ultimately validate or invalidate some or all of the assumptions and objectives they walk in the door with like, “We need a stock plan because we want to do this or that or both.“
Sometimes the client decides that they need more than one form of equity or quasi-equity program to meet the objectives and the motivations of the employees. Keep this in mind – it’s been documented by extensive research, including studies by the Employee Benefits Research Institute in Washington, EBRI, that you just can’t motivate employees. Employees have their own motivations, so you need to know what they are. EBRI research also indicates that retirement plans by themselves aren’t looked at as a good incentive by employees. More often than not, increases in wages or bonus arrangements, which align them to their performance are more effective and may need to be looked at.
So before you implement a stock benefit plan and learn sometime later whether the time and money and effort you take to roll it out and manage it gives you the results that you desire, test those assumptions you’re trying to rely on or the guesses that you’re making.
Speaking of benefits, this is Kevin Long of Employee Benefits Law Group. If you need specific guidance on this topic, let’s start a conversation.
And now for the fine print. This podcast is for general informational purposes only. It does not create an attorney, client relationship between Employee Benefits Law Group and the listener or reader, and does not constitute legal advice for a specific situation.