Loud and clear: How to explain your global equity compensation plan to leadership

When it comes to introducing a global employee equity compensation plan often senior decision- makers will need to be sold on the merits and potential benefits before giving approval. Read on to find out how you might explain equity compensation and related matters to an audience that may not be overly familiar with the details.

First off it is important to a) know your audience and b) customize your message accordingly. This is especially vital when dealing with company leaders or senior decision makers, who may have limited time to attend meetings or absorb information. That will guide how you frame your communication efforts.

Who you are speaking to will depend upon the type and size of business, e.g., a well-established company with a full board and layers of executives versus an early stage startup run by one or more founders. This will of course influence your approach, but the objective should remain the same – to make the case for equity compensation in ways that clearly explain what is being proposed and point to the potential upsides while acknowledging possible obstacles and/or difficulties to be navigated.

One of the keys to best making the case is to address whatever reservations might exist within leadership, ideally before they are even voiced. This is part of why knowing your audience is so important. In this context, that means looking to get a sense of how tuned in company higher-ups are to the specifics of equity compensation, what their concerns may be, and letting that inform your approach

Knowing what they don’t know

It’s possible that your company’s leaders may not be familiar with or have pre-existing knowledge of equity compensation, therefore the potential benefits for the business might not be immediately clear to them. It’s possible they may think the challenges associated with introducing an equity plan outweigh the benefits.

Don’t make the potential mistake of assuming that your audience knows as much about the topic as you do. Set the scene carefully. You may well be best served to pitch your message towards the least- knowledgeable decision-makers in the room, as opposed to those most up to speed. In other words, look to give your leadership team an Equity Compensation 101-style presentation. Focus on key concepts and points of information.

You could think of it as being an exercise in answering questions before they are even asked. What is equity compensation? How can it benefit the company? What is involved in setting up and maintaining a plan? Address each point in turn and make the effort to ensure that all key decision- makers understand what is being proposed before they are asked to adopt a position on it.

Helping you prepare

You will likely have to answer any number of questions ranging from the most basic to quite in-depth details, and while we cannot help you prepare for every eventuality, set out here are some of the more common topics you can expect to cover off.

What is employee equity compensation?

At its most basic level, equity compensation is non-salary, non-cash pay offered to employees. In practice, that can mean granting stock options or share awards linked to individual and/or company performance and/or time employed, rather than purely cash-based bonuses. Depending upon the circumstances, equity compensation might be used as an added incentive on top of whatever salary an individual already earns. Alternatively, an early stage startup with growth potential but limited cash reserves might use an equity-heavy package with the potential to offer big rewards in the future to attract key personnel needed to drive company growth in the here and now.

How to explain some of the equity plan types available to you?

There are many different plan types. Among the most commonly used are:

• Stock Options: Employees are granted the right to purchase shares at an agreed price after a defined period of time. Once that vesting period elapses, employees can choose whether to purchase the shares. Ideally, over time the company share price will have increased, thus offering plan participants the opportunity to buy shares at a discounted price.
• Restricted Stock Units (RSUs): With RSUs, a company effectively promises to grant shares to an employee at some point in the future, when vesting conditions related to performance and/or time have been achieved. A typical RSU plan might run for four years, with 25% of shares vesting each year, assuming plan participants have satisfied the terms of the agreement.
• Employee stock purchase plans (ESPPs): Under the terms of an ESPP, employees are given the opportunity to buy shares in the company, usually at a discounted rate, with the purchase price deducted directly from after-tax pay. Deductions are made for the duration of an “offering period”, which usually lasts between 12 and 24 months, with shares bought during “purchase periods” within that window.

What are the potential benefits associated with equity compensation?

Some of the most commonly cited reasons include:

• Recruitment and retention: Stock plans can play a vital role in helping to keep key personnel on the payroll and convincing new talent to choose one company over another. For example, startups generally find it difficult to compete with more established competitors when it comes to recruiting talent as they tend to not be able to match on salary alone. One way they can look to overcome this impediment is to offer a generous stock options deal to prospective employees which might lead to a windfall down the line in the event of the company achieving the hoped for growth and success.
• Alignment: Employees with an ownership stake have an active interest in the success of their company. That means when a business embraces wide equity-based compensation it creates a situation in which senior management and ordinary employees alike are committed to driving the company forward and seeing it achieve its goals.
• Performance: When employees feel like they have ‘skin in the game’, that correlates with deeper levels of engagement and improved performance. In essence, they tend to care more than counterparts without an equity interest and that is reflected in effort and commitment. They make a direct connection between their own performance, how the company fares, and the material rewards that can flow from that.

What is involved in launching and then maintaining an equity plan over time?

This question is worthy of a full article in its own right, but here we will be necessarily brief.

• Geography: Operating a global stock plan will by its nature be complex. That’s not to say that a plan offered in just one country will be straightforward, but when your intention is to cross international borders, additional considerations enter the equation. You may need to consider regulatory requirements in different jurisdictions, to what extent equity compensation is permitted, different tax implications etc.
• Eligibility: Who will you be targeting? Will your plan be exclusively for senior executives or will you opt for an all-employees strategy? If the latter, will part-time employees be eligible? For part-timers, will there be a cut-off for hours worked per week? What about consultants? There are just some of the questions you will need to answer early in the process.
• Communication: Once you know who you want to target, you then need to figure out how best to reach them and encourage participation. There is no one-size-fits-all for communications and this will depend on your own unique set of circumstances. You will likely need to develop a communications strategy with your employee demographic in mind. Are your people mainly office-based? Are they factory-floor workers? Is it a combination of both? The answers to questions such as these will guide you on how best to proceed.
• Administration: Getting to the point where you formally launch your plan is not the end of the journey. Far from it. Multi-year plans that might have multiple vesting and exercise moments can bring with them a massive administration burden. Sometimes companies choose to handle that load in-house on a spreadsheet; but the more complex a plan is and the more data accumulates over time, the more challenging that can become.

An alternative approach is to look work with an external equity management solution partner, such as JP Morgan Workplace Solutions. Our automated software can handle your administration requirements, removing the always-present danger of human error when relying on manual input. And the earlier you involve us in the process, the more you can benefit from our experience in the field.

What next?

Contact Workplace Solutions today to speak to our dedicated personnel and see how we could help you turn your employee equity compensation plans into reality.