3 Reasons Great Equity Compensation Creates Great Responsibility
The job market continues its fiery streak. Companies continue to grow, and investors are driving values high and higher. Individuals are asking for and often expecting a piece of the success their contributions have helped create. More and more companies outside of the traditional sectors of technology, life sciences, finance are turning to equity compensation to reward their employees. Equity compensation can give companies superpowers. But with great power comes great responsibility.
1. Vesting creates a new urgency to manage participants.
Companies work hard to hire the best people they can and manage out the worst people they employ. Great companies reward their best people. Some companies let a small percentage of not great, but also not valuable, and employees get pulled along in the wake of their success. Granting equity compensation magnifies the apparent problems with this habit.
A vesting schedule defines milestones for a person to show that their value matches the company’s expectations. Then you must teach managers and remind them to align performance with the awards an individual holds. Equity is a finite resource and cannot waste it on people who are not helping you succeed.
2. Diversity, Equity, and Inclusion.
Ironically, equity is typically the least equitable form of compensation. People with more forward personalities or negotiation skills often get larger grants than their peers, leading to long-term values that magnify slight variations in award size at the time of hire.
The arbitrage performed at the time of hire benefits the overly confident and leaves less for your best long-term performers. Companies should consider removing or severely limiting new hire equity negotiations to improve future DEI issues.
3. Minor errors lead to large problems.
When a compensation professional makes a mistake in the market pricing for a base salary, it may cost the company or individuals thousands of dollars. When a similar mistake is made for an equity grant, it can cost the company or individual hundreds of thousands or even millions of dollars. The equity paradox is that you must be supremely confident in your grant practices while incomplete or vague data support you.
When looking at equity compensation market data, you have little idea of the underlying details. You don’t know the intention of the awards. You have little or no details on vesting schedules, termination provisions, or performance conditions. You likely don’t know the prior growth history of the company or the expectations for future growth or an exit event. You don’t know what the investor waterfall looks like at each participating company. In short, the data provides a guideline, but it does not provide answers.
When granting equity compensation, take the time to understand the purpose of the awards and how your grant details, practices, and data contribute to or hinder your long-term success. Take the time to educate managers of the additional responsibility in managing their staff to their awards. Ensure your processes do not undermine the hard work you are putting into correcting DEI issues. Remember that equity compensation is missing more than it includes. Things reported as trends are probably only things a few prominent companies are doing. Best practices are just the most common way of using equity, not the best use for your company. As a burgeoning young superhero, take the time to learn your abilities and limitations. With equity compensation’s significant power comes great responsibility.
Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. Dan is also a leading expert on incentive plans and equity compensation issues. He has written several industry resources including a 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.