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Employee Stock Plans

Retaining top employees with stock plans

Content Team February 25, 2022 mins read

About the team

J.P. Morgan Workplace Solutions’ Content Team comprises a dynamic and talented team of writers and experienced professionals who strive to deliver useful equity insights and simplify complex equity information, all with the aim of helping you to better understand equity management.

Retaining top employees with stock plans

When you’re a founder of a start-up, a CEO of a growing SME, or an HR leader anywhere, there are few things that keep you awake at night more than losing key staff.

Your employees are the people who know your business, have been through the tough times, and are the ones willing to push the envelope with you – that’s why they are on your team.

And, it’s not just their value that is walking out the door if they decide to leave, it’s the cost of getting their replacement back through the door where things can really mount up.

According to a recent study by the Work Institute, it’s normal for a business to spend between 40 – 80% solely on employee salaries and benefits. It can cost up to 213% of an annual salary to replace executive positions within a company. Finally, the number of employees voluntarily leaving their jobs has increased by 8.3% over 2018 and 88% increase since 2010.

So, your biggest cost is people. The most valuable assets we have are our people, and our people are moving around faster than ever.

Not surprisingly, this makes retaining top employees a top priority for businesses across the board. It always has been and always will be, but in an increasingly competitive jobs market – particularly because of Covid and as remote working expands the horizons of where you can hire from, and where people can work – HR leaders need to find that extra edge over their rivals.

Enter employee stock plans and equity compensation; not just to attract top talent, but to retain it.

How do stock plans support employee retention?

A stock plan is an excellent and cost-effective way of retaining employees

Let’s start with the central question – does offering employees stock options mean they stay at your company longer?

The simple answer is ‘yes’, but with one important caveat.

In one 2017 study, ‘Retention Effects of Employee Stock Options: Evidence from Bunching at Vesting Dates’, it was found that ‘the retention benefits contribute greatly to the total benefit of options, which exceeds the granting cost by 95-275%.’ In other words, a company at least doubles its return on investment through an employee share plan in retention benefits alone.

However (here comes that important bit), the same study found that the quitting rates of participants double shortly after options vest. Essentially, some people wait for their money and then jump ship. While those numbers are relatively low, it’s still essential not to ignore this fact (and we’ll talk about how to turn it around to your advantage in a moment).

So, employee stock options have a very significant impact on retention but are not a silver bullet in themselves.

You have to take a more holistic mindset to get that competitive edge over our rivals – you have to make it part of a larger engagement strategy.

Why employee engagement is key in retaining top talent

We don’t want to just keep employees by financially chaining them to the wall – we want them to stay enthusiastically and be fully on board with the mission. In today’s language, we want them ‘engaged’.

We’ve hit you with a lot of facts today, but let’s give you a combination of another few. In their State of the Global Workplace Report 2021, Gallup concluded that global “employee engagement decreased by 2 percentage points from 22% in 2019 to 20% in 2020 and 80% of employees are not actively engaged or [are] actively disengaged at work”. In Western Europe, they found only 11% of employees are engaged. In the US, this rises to a relatively impressive 34% of employees are actively engaged in their work.

While it’s hard to conclusively connect the two, it’s interesting to compare those engagement statistics with the levels of employee ownership between Europe and the US. In European late-stage startups, employees own around 10% of the company, versus 20% in the US.

Why does all this matter?

Well, just focusing on retention, a team of engaged employees will see 59% less turnover than a team full of disengaged people. And this is nothing compared to when we zoom out and see that with an engaged workforce, companies are 21% more profitable than those with a disengaged workforce.

How to engage your workforce with your employee stock plan

We know retention is vital, we know that employee stock plans can be a cost-effective solution to retention but that it has to be part of a larger engagement strategy.

The question then becomes, how do you directly use your employee share plan to engage your employees?

There are a number of ways an employee stock plan can be leveraged to boost engagement.

Let’s look at some simple tactics you can start applying right now:

1. Give employees visibility with a digital equity administration platform

Almost without question, the biggest challenge businesses deal with when it comes to equity compensation is clearly communicating their benefits. Often, an employee will receive an email with some forms to fill in, and then they never see their options until vesting day approaches.

With a digital platform with employee access, your people can access their equity at any time and make it real in their minds. Building a culture of ownership and showing the employee their tangible assets within the company, strengthens the bond between employees and the company. Using a transparent digital platform is crucial for awareness, and helps you encourage the correct behaviours when it comes to ownership of the company through consistent messaging.

A platform, like Global Shares, for example, allow your employees to easily see how many shares they own, outstanding grants they still have, the potential value of their equity if they choose to exercise their awards and they also have the ability to exercise options and accept grants, seamlessly.

If they can see the benefits, you’re more likely to benefit from the effect that has.

2. Show the company’s future financial prospects through a Scenario Modelling tool

At the start-up and growing SME level, often the employees we are talking about are key partners, members of the senior management team. These can be the most crucial employees a business will ever have, making retaining them the top priority.

When it comes to leveraging your equity compensation strategy to engage these top, senior leaders, you need to provide more clarity on the company’s future prospects, and how their ambitions will fit alongside.

How will you show them valuations impacts, investments, post-money, dilution and how will it all come together? This is where scenario modelling comes in. You can use a scenario modelling tool to see exactly how a new financing round will impact your company – and more.

Whereas before you may have to sell the future to your top employees, with a scenario modelling tool they can see it clearly. This ability to visualise the future through hard data gives top employees the security (and enthusiasm) to keep ploughing forward.

3. Ramp up engagement around vesting days

Research shows that we spend the final year leading up to a big birthday – at 29, 39, 49 and so on – evaluating where our life stands and whether we want to make a change or not. This evaluation can lead to some people deciding that they need to move jobs, and smart companies know this.

To combat this natural instinct, the companies in the know will meet and talk with their 39-year-old employee and ask them what they want from their future, and how the company can support them getting there. In this way, the company becomes a positive part of any change the person might make (and indeed gets a boost of loyalty).

While not quite at the same level, companies need to think about vesting dates in the same manner. They must engage with those employees (particularly at the top level) around vesting dates to ensure that the company remains central to their plans and will be able to support their ambitions.

The most powerful engagement technique you have is one-to-one meetings. Use vesting days as a pivot to schedule individual reviews around, making the person’s upcoming vesting opportunity a part of the conversation. Encourage your line managers (or division leaders) to promote the next share plan and equity options during these meetings and give them accurate information to do so.

Beyond these individual meetings, there are several options like interactive group workshops, sharing of past success stories, email nurture campaigns, etc. to keep the employee engaged.

What you really need here is the right mindset; think about the efforts you will put into retaining a big customer whose contract is expiring soon – you should employ the same type of thinking when looking to retain a top employee through your stock plan.

An efficient, cost-effective way of retaining employees

We’ve seen how even passive employee stock plans are a cost-effective way of retaining employees, but the real value comes when you add on that layer of strategic engagement.

By using modern tools such as the Global Shares’ digital equity administration platform, you can engage your people at all levels of the business, give them clear reasons to stay, and get them excited about the future. Don’t take our word for granted, if you’d like to see for yourself how Global Shares can help your company, book a one-on-one, no-obligation consultation today.

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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.