Cafe Classic: The Gift Cardification of Equity Compensation

Editor's Note:  What can the ubiquitous gift card teach us about designing equity plans?  Quite a bit, it turns out, as Dan Walter reveals in his Classic seasonal post.

I seldom watch the morning news, but yesterday I made an exception and was treated with the genesis for this article.

Gift cards seem like the perfect gift. Regardless of the size, most people are happy when they receive one. They require some thought, in the form of remembering to buy the card and a bit of effort, in taking the time to obtain the card on the part of the buyer. But, not much knowledge is needed about the recipient. You don't need to know what they really want and the value seems self-evident. No need to consider the recipient’s perceptions or idiosyncratic cultural differences.

Gift cards should appeal to almost everyone and they are one of the most popular ways to show your appreciation for an individual. Unfortunately, the truth about these cards is different than the common marketing pitch.

The news report claimed that most people prefer gift cards to other gift items. But, those surveys seldom ask the same person if they would prefer good old cash instead of the gift card. When you are giving a card, you are paying money to give money. For gift cards to be better than cash there has got to be some upside beyond the fact that it seems safer and more convenient.

There are some bad and good things that apply to gift cards that simply don't apply to cash. Nearly all gift cards have a finite life expectancy. Many expire within five years of purchase or activation. Some require annual maintenance fees that draw down against the value until fully utilized. But, they can also inspire people to delay use until some real need or item with great personal value becomes available. This type of delayed gratification is seldom seen as a benefit of cash in your pocket.

It is also true that gift cards can have more or less value in the future than they had at purchase or gift date. Perhaps the home currency of the gift card is stronger than the currency of a destination. The gift card can grow in usable value even while its base value remains constant. The value can also lessen over time. While this may be caused by actual underlying values changing, it is more likely that the decrease in value is due to the gift card being lost or forgotten. Without someone to remind you of its value and purpose it may just sit in a drawer to expire with its value still intact.

Now, take a moment and re-read the article above. This time every time your read “gift card” replace that term with the type(s) of equity compensation offered by your company. As they say: ’Tis the season” to understand the impact of your compensation programs.

4 Things You Can Do to Avoid the “Gift Cardification” of Your Equity Compensation.

1. First, treat your equity compensation in way that shows you understand the recipient.
2. Make sure you understand how much your employees value cash and make it clear why you are giving equity compensation instead.
3. Don’t assume that your equity compensation will be perceived as valuable. Take the time and money to explain how equity is, and can be, valuable (and be honest about how it can lose value.)
4. Be considerate and regularly remind people about their equity and about the prior three points.

During this season of giving, don't let your employees throw away potential value. Let them KNOW you care by showing them you know who they are and what they want.

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.

Comments

[Karen Kervick]

If understanding one employee or candidate's values regarding gift cards (stock) vs cash, is it equitable to offer gift cards (stock) to one manager but not another at the same level?

I'm wondering how arbitrary the award can be in employee offers. If one employee values it but another does not, is it okay for employees in the same role even to have those differences in their compensation packages?

Or should you have definite lines of eligibility for offering stock options related to the position level, as in only directors and above for example?