The last quarter of every year is when people start paying closer attention to equity compensation. Budgets for annual planning are in play. Stock price projections (or guesses) from the prior year are proving to be far too conservative or lofty (they are seldom on the nose.) Burn rates are being discussed. For many companies, ESPP purchases may be on the horizon. And all of this happening while merit cycles and initial annual bonus calculations are being addressed. Given this tumultuous landscape, what can you do to make things better next year?
- Is your equity still aligned with its intent (or vice versa)?
I have written about the criticality of “intent” in the past. Your equity plans should exist to do a few specific things. This first step is reevaluating that list of intentions and making sure there is still agreement from key stakeholders. The next step is reviewing whether your plan, given changes in the market, your company, etc. is still designed to properly deliver on those intentions. If your plan is meant to make your total reward value ultra-competitive, is that proving to be true? If your plan is meant to be a sweetener on top of very competitive cash compensation, are the values higher than need be? Can you use fewer shares to accomplish your goals? Is it time to move from sizing grants based on numbers of shares to an approach that converts the current or potential future value into grant sizes? If you do only one thing for equity plans before year-end, this analysis is it.
- Is your equity is helping attract the right people?
How often do you need to adjust your equity offering to “get” the talent you want? This should be a rare event, not a common practice. When your equity is properly designed and scoped, it should help close the right candidates without modification. Misses in this area may be due to design or grant sizing, but often are a result of subpar communications or a lack of understanding by your talent acquisition professionals.
- Is your equity is retaining the right people?
Replacing valued people is far too expensive. Keeping bad people can be even more expensive. Turn-over must be evaluated in light of equity holdings. Are there patterns that indicate your program is weak? Equity is a long-term device that should align closely with your retention strategy. If your good people are leaving valuable equity on the table, or if your worst performers won’t leave voluntarily even after a couple of years of not receiving raises or bonuses, you may have an issue to address.
- Is your equity motivating and engaging the right people?
This will be tough in 2020. In fact, it may be a good year to shelve this topic. A bifurcated market recovery that has driven the values of a smaller percentage of companies while decimating so many others, may not be the best indicator of plan success (positive or negative.)
- Do your employees properly value their equity?
Whether your stock price has soared or crashed this year, much of your equity still has value. Recent studies have shown that more than 85% of individuals do not understand their equity. It’s pretty easy to infer that if someone does not understand their equity, they cannot properly perceive its current or future value. This is low-hanging fruit. Communication programs do not require shareholder approval or huge budget requests. They mostly require time and effort. The value of better communications cannot be overestimated.
Addressing these five topics over the next 12 weeks will provide a foundation for the new year. They will also provide the foundation for information to include in communications to shareholders as your company discusses successes and needs in the future. Most importantly, you will be ensuring your very limited equity compensation budget is being used as efficiently as possible.
Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He has convinced himself he is a “Compensation Futurist” and works as Managing Consultant for FutureSense. 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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