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Rising inflation and salary increase demands? Consider equity compensation

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Inflation-salary demands-equity compensation

Rising inflation is threatening to create a serious headache for employers this year.  

The ongoing exodus of employees in the so-called “Great Resignation” has been challenging enough for companies to cope with, but upward movement in inflation which began last year and is expected to continue throughout 2022 has made issues around retention and recruitment even more complicated.  

Inflation and staff shortages are separate points, but overlap in one important respect – both create upward pressure in terms of salary expectations. In a jobs market where the balance of power has tilted towards employees, at least for now, more and more companies have found themselves needing to improve salaries and overall conditions just to hold onto the key and other personnel. Parallel to this, steadily increasing inflation has fueled calls for salary increases to compensate for the higher cost of living, meaning companies are facing pressure to increase pay across two separate fronts.  

What can be done to manage rising inflation and salary increase demands?

Neither issue is likely to go away anytime soon, so employers have no choice but to meet the challenge head-on and find the best and most sustainable way forward for their business. And what is that way? Clearly, it will not be sustainable or even wise for businesses to attempt to keep pace with inflation. That could lead to the kind of wage-price spiral that economists dread, bringing with it the potential to do serious harm to the economy.  

So, even if companies can afford to look to increase pay to match or stay ahead of inflation (and many cannot), informed opinion would counsel very strongly against this course of action. What then? To simply refuse requests for salary increases runs the risk of losing employees at a time when there is an active labor shortage, making people harder to replace than perhaps ever before.  

Employee ownership in a time of rising inflation

Instead, now may be the ideal time for companies who have yet to do so to embrace the employee ownership model and for those who already operate staff stock plans for to further expand their efforts. Offering generous equity-based incentives to new hires and additional share awards or discounted purchase plans for existing staff may be key for companies looking to navigate their way through this challenging period.  

It’s not hard to see how this approach would be attractive for employers, but it may be a little more difficult to persuade current and prospective employees to come around to that way of thinking. We’re all feeling the impact of price increases and know there is more to come, so many individuals not unreasonably might prefer the idea of extra money in their pocket now rather than being offered the prospect of potentially more lucrative windfalls further down the line.  

The good news for companies on this point is that there are sound reasons why employees should be open to such proposals. Indeed, more equity-based compensation can ultimately represent a win-win for both companies and employees. The challenge for employers is to communicate that rationale clearly to workers, and in so doing educate them on the merits of stock plan participation, even at a time when the cost of living hikes are forcing many of us to tighten our belts.  

The importance of financial education

Financial education is incredibly important. And yet, even though most of us will recognize the truth in that statement, it doesn’t necessarily follow that we are financially literate.

Sound financial planning doesn’t merely relate to whatever amount is in your bank account at any given time. It’s about much more than that – long-term planning is a key element of any approach to handling personal finances, which means not just focusing on today, but instead taking a long view and trying to put in place a financial structure that will help you cope with the curve balls that life can and will throw at us.

That life can take unpredictable turns shouldn’t be news to anyone who has been following world events in recent years, and yet many of us still do not look to future-proof our finances or give sufficient thought to what resources we will need in retirement. Any sound advice on financial planning will stress the need to identify where you want to get to in the future and then think about how to get there, yet many workers do not make proper preparations.

Sometimes that lack of preparation might be a function of financial pressures in the moment, but it can also arise from not being sufficiently educated on how to manage personal finances. This is where companies have an opportunity – to educate employees on the upsides of equity compensation in the here and now, with an eye on future benefits, as opposed to merely increasing salary and providing an immediate financial boost.  

Explaining the benefits of equity compensation

One of the biggest hurdles companies must overcome when looking to attract participants for a stock plan is that employees may lack full knowledge of the area and therefore not appreciate the benefits that can accrue to them.

You must provide staff with the necessary information to fill in their knowledge gaps.

Otherwise, employee ownership can be a hard sell, with – depending upon the plan being proposed – staff perhaps focusing on an up-front cost more than the bigger picture of what employee share ownership is and what it can provide.

The onus will always be on a company to overcome whatever misconceptions may exist among the workforce, but it becomes incredibly important to communicate the benefits of share ownership in the current climate, when employees may be even more focused on their take-home salary.  

The advantages associated with equity compensation will vary from plan to plan and from jurisdiction to jurisdiction, but a common point is favorable tax treatment. Whether stock plans involve, for example, stock options, restricted stock, or performance shares, generous tax treatment – as long as specified rules are followed – is a major attraction and offers participants the possibility of a significant windfall in the future.  

Make sure employees understand the benefits of what is being proposed. Never make assumptions on their level of knowledge.  

How to appeal to your employees?

Even if you have the best equity plan in the world, effective communication is vital. You must understand the needs of your target audience and attempt to speak directly to those needs. Failure to do runs the risk of your plan – no matter how good – not gaining traction among employees.  

At the current time, anxiety is on the increase. The cost of living is edging upwards, leaving many employees concerned about the state of their finances and how they will cope. This breeds a sense of losing control. Against that backdrop, one potentially effective way to generate interest in a stock plan is to pitch it as a means of regaining control of your financial situation. By crafting a message that emphasizes the idea of taking control of your finances, of investing small amounts now to potentially reap a lucrative reward down the line, you may catch the interest of your employees.  

The bottom line is that while on the surface this may look like a tricky time to encourage employees to sign up for equity compensation plans, this need not be the case.

If you can show that you understand whatever financial concerns your target audience may have and can frame your message in terms of helping to address those concerns, then you may well be able to convince your employees that equity compensation is the right choice for them.  

Global Shares can help you

Global Shares’ award-winning combination of software and support will help you every step of the way. Our team of experts can work with you to design and launch your plan, and then work with you on the day-to-day business of maintaining and improving your plan after launch.  

Please Note: This publication contains general information only and Global Shares is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. The Global Shares Academy is not a substitute for professional advice and should not be used as such. Global Shares does not assume any liability for reliance on the information provided herein.

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