Broad-based equity compensation plans, financial literacy and financial education

The offering of employee equity compensation awards to a wider workforce beyond the C-suite can have a positive impact on companies. Broad-based plans can promote buy-in and engagement across all strata of a company, but do bring with them a need to consider financial literacy levels among these new demographics which, without proper educational supports, could prove to be an impediment.

Recent high-profile instances of large companies signaling a commitment to broad-based equity plans suggest that the benefits of employee ownership throughout all levels are becoming increasingly recognized at boardroom level. While this will undoubtedly be welcomed by employee ownership advocates, a trend towards stock plans targeting all or most of a company’s workforce will also draw attention to a related issue – namely, the need for financial education.

When equity plans are targeted mainly at the C-Suite, other executives, and senior managers, it is not unreasonable to assume that the relevant individuals will more than likely understand what is being offered to them. However, that may not necessarily be the case with a broad-based plan, which, by its nature, will seek to include a range of different types of employee, not all of whom will necessarily be up to speed on the latest developments in equity awards, while for some it may be their first exposure to the very concept.

The importance of financial literacy

To underscore the potential seriousness of this issue, a recently published report on financial literacy among adults in the United States found that respondents scored on average just 48% when completing a 28-question survey designed to measure knowledge and understanding around financial decision-making.

The 2024 TIAA Institute-GFLEC Personal Financial Index report also showed that levels of financial literacy have been trending downward in recent years, with the 48% score achieved this year and last year representing a low-water mark in the eight-year history of the annual publication, with scores having peaked at 52% in 2020.

This being the case it is not a reach to suggest that up to half of a given workforce might be possessed of at best moderate levels of financial understanding, with that number perhaps higher or lower in specific industries and individual companies. The point is this – financial literacy in the workplace is an issue, and it could prove to be an impediment when companies look to introduce a broad-based equity plan. From the company perspective, the nightmare scenario would be that a sizable percentage of employees might not understand what was being proposed, either failing to recognize the opportunity and/or over-estimating the risk, and arising from that choose not to participate.

Education can boost participation

So, even if only looked at through the prism of wanting to encourage high participation rates, it is in the interests of companies introducing a broad-based plan to encourage financial literacy in the workplace. In the short-term, this would mean putting time and care into the communications strategy leading up to registration, with a view towards trying to demystify and help as many people as possible to understand what is being proposed.

One of the keys to an effective communications strategy is to be conscious of your target audience. This means designing content and choosing delivery mechanisms with specific groups in mind, i.e., not a one-size-fits-all approach. For example, sending information entirely via email would make more sense for office or desk-based staff rather than if the majority of your employees are factory floor workers who don’t access email on a regular basis. For the latter group, informative posters on walls and flyers in canteens and other common areas might prove more effective. In a similar vein, recorded messages, power point presentation, and webinars hosted on the company Intranet may work well for office-based employees, but face-to-face engagement may be needed to ‘sell’ the plan to the factory floor.

Next steps

However you proceed, it is vital you recognize that there will be varying levels of knowledge on equity plans among any workforce and you develop your education strategy accordingly when it comes to letting your people know what is being proposed and how it can benefit them. If you make the mistake of assuming most or all already understand, you may pay the price in lower than hoped for participation rates.

Essentially, employees need to understand what they are being offered before they can decide to accept it. The challenge for companies is to provide their people the information they need and deliver it ways that best facilitate that learning.

At J.P. Morgan Workplace Solutions we work with companies from around the world every day to develop equity compensation plans and supports designed to help bring their reward strategies to life. We understand that your employees are at the heart of everything you do. Our tech and service-based offering was created to empower employees to easily navigate their workplace incentives with more confidence.

Find out more.

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