Specific ways to use equity compensation for attracting and retaining the top people your business needs to flourish.
Last month, I wrote about positioning your company to attract and keep top performers. asx how to buy shares One very effective way to do both is to compensate your key employees with equity.
Performance pay has become a critical factor in keeping top talent; combine it with a sense of ownership and a stake in the future of the business, and you've got a powerful set of incentives.
That is what equity does. Equity compensation has a simple theory: pay generously in the future with the financial value that your employees helped create and make it expensive for them to leave. In this article we'll look at three ways to do that.
Why not use other compensation options such as profit-sharing or performance bonuses? Bonus and profit-sharing plans are more likely to reflect past performance than future efforts, and that's where you want people to focus. Once paid, they cannot be increased by any amount of hard work, creativity or imagination. Bonuses and profit sharing are typically one-time payouts, which in today's what-have-you-done-for-me-lately atmosphere are quickly forgotten. Finally, bonuses require cash - and profit sharing requires profits. Both (or either) of these items may be scarce in a growing business.
Equity addresses these shortcomings. Equity is the bonus that keeps on giving. Equity compensation will likely increase in value over time. Equity acknowledges your employee's past contribution, but its real payoff is for work still to be done - and your people have to stay around to reap the rewards. In real terms, the current cost of equity compensation is cheap, especially relative to the loyalty it can purchase. Plus, since no cash changes hands at the time of the equity bonus, you can use it as a reward even if your company is cash-strapped.
There are other plusses to equity. Especially if your business is likely to go public or be acquired, equity helps top talent choose between your smaller company and job offers from larger, well-heeled public companies. Equity also highlights the shared interests of your company's owners with the "rank and file" and makes top performers feel that the business is theirs.
Stock grantsare easy to implement. Your company grants a key employee a specific number of shares, the value of which is the total company value divided by the number of outstanding shares. That's it. Shares are more tangible than any other type of investment. Stock makes your key people feel like owners, and when people really see themselves as shareholders they rarely want to leave.