Equity compensation can be trickier than many in our “set it and forget it” society look for in an incentive tool. Executed well the results are sublime. But use too much or too little of something and the result may be far worse than you can imagine. Old school equity plans can be viewed as a pressure cooker, more modern designs are more like an Instant Pot. The differences are critical in times like these when markets are willy-nilly and compensation plans are under extreme pressure to perform.
Pressure cookers usually work well in your kitchen or even camping. They are fairly inexpensive and when not in use, can be easily stored with your other cooking tools, but the risk of failure is high. The stories about pressure cookers coating kitchens in exploding stew are legendary. Even small miscalculations can result in your pot basically becoming a sprinkler head of hot Chicken Chili Verde. (Yes, a specific example because it happened to me.) But, if you have never had beef short-ribs, or pulled chicken prepared in a pressure cooker, you have never really eaten well.
Instant Pots require a more refined environment. You need space on the counter that is near to an electric outlet. You need a place to store the machine when it’s not in use (and it usually isn’t in use). The resulting product is great and the risk of failure is fairly low. While the wrong mix of ingredients may still deliver a poor meal, it is unlikely you will find soup on the ceiling in a house with an Instant Pot.
Like pressure cookers, basic equity compensation plans have been around longer than you. They have generally worked well, and most people have not experienced any troubles. When used with care in controlled environments they have a high probability of providing predictable results. In certain cases, they can even deliver the sublime. If you have never chatted with a mid-level professional who became a millionaire from startup Incentive Stock Options, you should give it a try!
But we know so much more today than we did 30+ years when stock options started joining the ranks of commonly used compensation elements. In that period we have realized that a pressure release valve is important when the market goes crazy. We have learned that an auto-shutoff function can save the day when things move in ex-expected directions. We have learned that a bit of better engineering and space on our counter can worth the cost and occasional inconvenience. If you have never spoken to CEO or compensation professional who has had to explain plan failure to their Board, give it a try!
Over the next several weeks I will address more issues related to equity in volatile markets. I will cover when it’s a good time to consider an option or RSU exchange. How to value and level grants sizes when your stock price has moved more than your models predicted. As I write this they are announcing the end to the 11-year bull market that began in 2009. You and I will have a TON to talk about over the next few months…
Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense and has three metaphors for every occasion. Dan is also a leading expert on incentive plans and equity compensation issues. He has written several industry resources including the only resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @DanFutureSense.
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