Equity compensation is a form of non-cash payment that is offered to employees. The equity component includes options, restricted stock, or performance shares. These forms of equity are all ownership in the company. The option of equity compensation gives the employee the ability to share the profits through stock appreciation. Giving employees the opportunity to reap the benefits of their hard work to better the company improves retention and employee satisfaction. Keep reading for what you need to know about equity compensation.
Mostly public companies and start-ups provide equity compensation as a form of income for their employees. If a company is not making enough money to provide a competitive cash salary, they make up for it through stock. Equity compensation typically attracts higher quality employees.
Stock options is the most common form of equity compensation. Stock options offer employees the right to purchase shares of company stock at a different price than the market value, also known as the exercise price. Allowing the right to vest lets the employee have control of the option. Vesting means giving or earning the right to a present or future asset, payment, or benefit. Once the option vests, the employee can sell or transfer the option.
Non-qualified Stock Options and Incentive Stock Options are only available to employees, not employee directors or company consultants. There are special tax advantages that come along with nonqualified stock.
Restricted stock represents the company’s promise to pay an employee with shares of the company based on a vesting schedule. Restricted stock can only be used after the completion of the vesting period. Vesting can be completed at one point in time where you receive the full right at once or equally over several years where you increasingly get more of the right to the restricted stock.
Performance shares are rewarded depending on the employee’s outcomes and results through their work. Typically, performance periods last for several years. Performance shares increase employee morale and work attitude by being able to benefit from their hard work.
If you are being offered equity compensation as part of your income from an employer, be sure to understand your equity package. Consult with a financial advisor to make sure you know what type of stock and options you are receiving from your company. Equity compensation is a great way to feel emotionally invested and be financially invested in your company.