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What is equity compensation?

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What is Equity Compensation?

Here at Global Shares, we spend a lot of time talking about equity compensation. It’s our 101. Our MO. It’s what we do and what we’re about. In fact, every single one of our posts is about equity compensation – its various forms, methods and rules.

Not everybody knows the term ‘equity compensation, though.  What are we talking about when we talk about equity compensation? Our motto is Employee Ownership, Simplified – but does everybody know what we mean when we say employee ownership?

Put simply, equity compensation is a different way of saying employee ownership. It’s a method of payment that a company can offer to employees to partake in ownership of the firm. It comes in a wide variety of forms and plans – ESPPs, SAYEs, etc.

In this post, we’re going to discuss the pros and cons of equity compensation, and then we’re going to provide a roadmap to avoiding the cons. Let’s start with the pros.

 

What are the advantages of equity compensation?

One of the major advantages of equity compensation is the financial considerations, both for the employer and the employee.

Equity compensation allows employers to offer their employees more – which is great for the employees – while not affecting their bottom line – which is great for the employer. (And the employee as well, as it means the business can hire the best talent while remaining on solid financial ground.)

The advantages vary from plan to plan, and jurisdiction to jurisdiction, but they generally come in the form of tax advantages.

Many people think of equity compensation as a tool only for larger and more established companies, but the financial advantages make them particularly useful for smaller companies that are just starting out. Equity compensation allows companies to offer their employees a portion of their potential when they don’t have much cash to hand.

Another major advantage is the environment it fosters within the company. Employers benefit from the alignment of their employees’ values with those of the company – the better the company performs, the more money the employee-owner makes.

Studies have also shown that employees in a company with equity compensation have lower absenteeism and higher retention. And employees benefit from their hard work directly impacting how much they can earn, as well as a feeling of team spirit – they’re not just employees, they’re employee-owners and can often make valuable contributions to the company’s direction through shareholder voting.

That sense of team spirit and financial fairness also makes the company a more appealing place to work during recruitment.

Equity compensation can level the playing field for smaller companies with less to offer financially, and make larger companies seem more connected and empathetic to their employees.

 

What are the disadvantages of equity compensation?

The main disadvantage, the one that we always hear from companies hesitating to implement equity compensation, is the matter of complexity.

And it’s true – equity compensation brings with it a lot of reporting and regulations to follow, as well as entire areas of jurisdiction and tax laws that you might not have previously considered, or even considered considering. And that’s just the reporting side – there is also a tremendous amount of work and thought that needs to be put into the design of the plan.

Not only do you need to design a plan that is tax compliant, but you also need to design one that brings out your strengths as a company and one that lasts. You don’t want to design a plan that gives away too much of your equity, or too little. You need to get the balance just right – and it’s not as easy as it sounds.

Luckily, there’s an incredibly easy fix to this: employee ownership (and equity compensation), simplified.

With Global Shares’ award-winning combination of software and support, we take on all of the complexity and the hard work required for your equity compensation plan.

Our teams of experts will take you through Implementation, where we work with you to design and launch your plan, as well as the day-to-day business of maintaining and improving your plan after launch.

Our dynamic, customisable equity compensation software makes it easy for participants to view and manage their equity, but just in case, our multi-lingual Support Desk is always ready to answer any questions.

Contact Global Shares for a free demo today.

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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