Stock options. It seems like everybody is talking about them these days. Technology is taking over our lives, and as more and more tech companies enter the market, the competition for revenue and employees is increasing. This means that share options – already the tech industry’s favourite benefit – are increasing in popularity as well.
This has been the case ever since the technology boom started. Brand new technology makes the old stuff redundant – but the old stuff has had years to build a fortune and a war-chest. The new stuff might be a great idea and the next big thing, but for right now it’s still a small thing. They don’t have as much money to offer employees, and they have razor-thin margins already – how can they possibly compete with the old stuff?
Simple. Start a staff equity scheme and roll out employee stock options. And the best part is – they’re not just for tech companies or small businesses. Employee stock options can help any business thrive.
What are employee stock options?
Employee stock options are a way to offer your employees a portion of your company’s potential. You offer your employees a grant, which gives them the option to purchase a certain amount of stock in your company, for a certain price. Let’s say, $1 per stock. Generally, the employees have to wait a certain amount of time (vesting) before they can exercise their options. Let’s say, they have to wait three years.
You’re a startup, with a revolutionary idea – three years later, the stock price is $10 per stock. The employee still only has to pay $1, and they can sell them for the full price, $10. That’s a lot of profit. Besides, employees usually don’t have to put down their own money to pay for the stock – they pay the cost out of their profits from the sale.
That’s it. It’s a pretty simple idea when it comes down to it. Let’s take a look at why they are so important.
This is a phrase that is tossed around a lot, but it’s usually left to people’s imaginations as to why it is such an important benefit of staff equity schemes.
Employee stock options mean that your employees will think like owners. After all, they are owners – even if their options haven’t been vested yet, they are still going to earn a portion of the company’s potential. Just like you – like managers and owners – the better the company does, the greater their reward. They are going to be far more likely to weigh their decisions according to what will help the company best.
Imagine two employees. One has stock options, her name is Mary. The other does not, his name is John. Both are accountants. One day, one of their colleagues comes up with a better way to input data – it’s more manual, and is a bit harder to do, but it’s more than manageable and it cuts costs significantly. So, it’s better for the company but it takes more work. Which employee do you think is more likely to implement the new process, Mary or John?
Mary, of course. You could issue a memo, and make the new process mandatory, but how often does that really influence employee behaviour? More importantly, how often does it influence behaviour without grumbling? Mary wants to do it, because the better the company bottom line, the better value her stock options are. That’s why share options are so beneficial – they’re positive reinforcement.
That’s not the only benefit, though – not only will your employees be thinking like owners, but studies have shown that employee ownership is linked to better employee morale and motivation, all the way to reduced absenteeism.
Stock options are also a great way to improve employee retention. Most stock options vest over a number of years – in most plans, employees receive a part of the grant each year over a number of years. (For example, they receive a third of their grant each year for three years.) This gives the employees a great incentive to stay with the company for longer – if they leave early, then they won’t receive the full value of their award. At an up-and-coming startup, that could mean leaving a lot of money on the table.
Douglas Kruse, a professor at the Rutgers School of Management and Labor Relations, presented testimony to the Subcommittee on Employer-Employee Relations, reviewing numerous empirical studies on employee ownership firms. He found that ‘Employee ownership is associated with greater employment stability, which does not come at the expense of lower efficiency’. According to Kruse, it is also linked to higher rates of firm survival.
In conclusion, employee stock options are a great way to make your company thrive. You make your employees happier, and they work harder and with an ownership-focused mindset. And it’s a feedback loop. The better your employees work, the more your company grows, which means the employees make more money and work even better, and so on.
But like any plan, you need to make sure you have the best staff equity scheme set up – which means you need the best equity compensation software, as well as the support staff to launch your plan and keep it running smoothly. At Global Shares, we have 14 years of award-winning equity compensation management experience.
Contact us for a no-commitment demo today.