More Specific Equals Less Accurate (MS=LA)
Equity compensation confounds many in the compensation world. There are lots of reasons for this, but perhaps the least understood is its association with Vincent Van Gogh. No, people with equity don’t die penniless in an institution. And no, the typical equity compensation expert does not cut off their own ear. But like so much of impressionist art, appreciation of equity requires the ability to step back from the details and the need to bury yourself in the technical details. For the sake of this post, we will discuss the first requirement, distance.
This post is about a simple formula: MS=LA
Compensation people love to be precise. Benchmarking base pay is more science than art. Heck, a 2% difference in base pay can be the change for a whole year. That means that a 1% mistake is enormous. We grind through deep job descriptions, match arcane aspects of tough jobs and twitch people up and down to find the perfect base pay and total cash match. This specificity gives comfort to many in the profession. It’s hard to be wrong when you do something e x a c t l y right.
Equity compensation turns this on its head. Equity is basically art that is informed by science. Rather than try and paint a perfect sky with perfect stars, you must paint something that tells a story about the sky without ever painting a star. When you see a piece by Van Gogh or most impressionist artists from a distance, you almost always know what it is. As you get closer the swirls and blurriness distract from the ability to “see” the piece. When you get incredibly close the details are fantastic, but it can be hard to understand how the artist put them together to create a bigger picture.
With equity, you must be comfortable with data that provides direction rather than answers. Should that software engineer actually get 0.037498% of your company’s fully diluted outstanding shares? Maybe, but maybe not. Should your level 4 account get 17.3% equity than your Level 3 Accountant? Perhaps, but 19% or 15% more are likely to be just as accurate. The specificity of award size is not your goal. Your goal is delivering the intent of your program, for a given position.
For those of you who loved the idea of “broad-banding”, equity is probably more comfortable. But for those who have grown up in a world of 3% annual increases and data-driven CEOs, it can be extremely frustrating. You need to find a way to get them to look at equity from a distance. Paint a picture, using all of the data and your expertise, so that when it's seen from afar it clearly communicates your goal. Don’t argue that the tree should or should not be blue, just get them to agree it’s a tree. The rest of the process comes down to technical details I will discuss in my next post.
Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. He has three metaphors for every occasion and is a leading expert on incentive plan and equity compensation issues. He has written several industry resources including the only resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, , “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @DanFutureSense.