It’s hard to recall a time when the world’s economies were more volatile – in fact, the business world, in general, is up in the air, with companies globally asking the same questions – what to do in order to cope with the current crisis?
Confusion is rife and nowhere is this more true than in the financial markets. Everybody has answers, but nobody has the answer, to the question: what do we do now?
We’re just like everyone else. We don’t know exactly what’s going to happen – nobody does. But, we want to buck a trend. We want to share the same advice twice. Why? Because it’s great advice, and it might not be as self-evident to others as it is to us.
In case you missed it, one of our previous Academy posts discussed startups that were taking an unusual route through these confusing times. Instead of making workers redundant, or simply cutting salaries – they asked their employees to trade part of their salary for stock.
The company we mentioned used Restricted Stock Units as an incentive, but it made us realize something. Giving your employees stock options right now is one of the best pieces of advice we can give.
I know what you’re probably thinking. You’re thinking: hold on, the stock market is way down, why would we offer stock options in this market? And who would want them?
To be sure, if you go down this route, you’re going to need a robust and dynamic communication plan to make sure your employees understand your reasons, and the benefits they stand to gain. We can help with that too, but first, you need to understand the reasons and the benefits. So, here’s a quick explanation of why employee stock options might be your best option right now.
It’s getting harder and harder for companies to find powerful incentives for their employees. Cash reserves are low for most, and even for those who aren’t, since nobody knows the length of the crisis, they’re saving all they can, just in case. That’s a sound policy, but it doesn’t leave much room for employee incentives.
This is why stock options are so powerful – they’re a powerful incentive that doesn’t require cash payments. Not only that, but they’re tax-efficient for the participants. Win-win.
That’s always true, though. So why are they a good idea in the current climate? They’re directly tied to your company’s stock price.
The way stock options work, if you’re not familiar, is that you grant participants the ability to buy a certain amount of stock, at a certain time in the future, for a set price. The set price is generally the current market price. The employee then holds on to the options for a year, while the stock price rises. When the participant sells the options, they sell them at the stock price.
We’ve all heard the saying: buy low, sell high. This has always been the idea behind stock options. The stock price rises over the years, but the participant only pays what they were worth when they were granted. It’s a way for employees to profit off of a company’s potential, with the benefit of hindsight. And the market price right now, for nearly every company, is very low. Which means, the difference between the price the participant pays and the price they’ll sell for is potentially massive.
Now, of course, there is a risk. There are companies that might not recover, and if so, their stock options won’t be worth anything. That’s always the case; stock options always carry risk, but they also carry a great reward for the employees in the companies that succeed. And with the exercise price so low, the gains can be tremendous.
At first glance, it might seem counterintuitive – to offer your employees an incentive-based on stock prices that are generally at a very low price. But that’s the genius of employee stock options. The lower the price right now, the greater the potential reward. They’re cash-efficient for you, and they’re tax-efficient for your employees. And besides, employee ownership by itself is a powerful incentive. Because that’s what you’re doing – harnessing the power of employee ownership. With everybody working from home, it can be hard to make sure your employees remain focused and motivated. But this way, they’re no longer employees – they’re employee-owners. The better the company performs and succeeds, the greater their reward.
Even with all these great benefits, it can seem quite daunting to set up an employee stock plan; you might not know where to start. That’s where we can help.
At Global Shares, we’ve been providing companies with award-winning equity compensation software and support for nearly a decade and a half. Contact us for a free demo, and we can show you just how easy it is to harness employee ownership.