Is it more important for the company to retain key employees over time, to reach a particular type of financial or non-financial goals, or to foster a shared culture across different entities and national borders? An effective equity compensation agreement is set up depending on the company’s objectives, and must be adapted to both national and international contexts based on the company's nature and stage of development.
The purpose of equity-based compensation is to align the interests of owners and employees, ensuring that both management and employees are motivated to perform consistently in the long term. In this article, we will outline the advantages of equity-based compensation in terms of perceived value for employees, and the potential benefits for management.
Employee benefits from equity incentives
Equity compensation can often appear complex and difficult to understand. Therefore, it is crucial to clearly explain the incentives employees can receive through an equity incentive agreement.
- Equity incentives serve to motivate employees by giving them a sense of ownership pride, and allowing them to share in the financial rewards that come from company growth and success.
- Equity incentives are a tangible way for the company's owners to recognize and value employees' contributions.
- Equity incentives are viewed as solid long-term investments, often offering attractive discounts or bonus shares that make them even more appealing.
- Compared to regular bonus programs, equity compensation has the potential to provide much higher rewards. Shareholders are often more willing to give additional benefits to employees when they themselves are benefiting from the company's success. Also, if employees show commitment to the business and are willing to share the financial risk, the granting of these incentives becomes more reasonable.
- Equity incentive agreements can provide some tax benefits compared to ordinary purchases of shares.
- Equity incentives can serve as a signal of employees' and management's faith in the company, fostering a collective mindset of "let's grow together". Equity compensation cater to the modern employee's desire to be part of something greater than a paycheck.
To explore the advantages and disadvantages of different types of equity incentives, refer to the articles on various equity compensation instruments; Options, RSUs, RSAs, and purchase and savings programs.
Benefits of equity incentives for the company and shareholders
Equity compensations plays a vital role for the company and its shareholders by motivating participants to act in ways that enhance the company's value. Even if the employees aren't directly involved in the company's operations, their interests align with those of the owners since the company's value depend on its performance and share price.
- Can be critical in attracting top talentin a globally competitive economy where top talent is in high demand.
- Can help to retain employees over time (binding effect) and reduce the loss of expertise by setting an earning period / binding period.
- Increases satisfaction and financial security among employees through potentially lucrative incentives, which result in increased work effort because they take part in the success.
- Equity incentives can contribute to cost limitation in employment. Particularly in start-up companies, equity compensation is used as a measure against large liquidity disbursements.
- Equity incentives are used to build a shared culture within the company, aligning the actions of employees and management, which proves valuable during acquisitions or mergers involving operations with different cultures.
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