How offering stock, RSUs and deferred compensation plans can help
Did you know that in 2021, half of employees under the age of 35 rated equity compensation as “important” when thinking about switching jobs? And that restricted stock units (RSUs) have now become the most common type of this kind of equity compensation? As a business owner, offering stock is becoming a must-have on the list of things to offer potential new employees, as well as in retaining valuable team members. Here’s what to consider.
WHAT’S EQUITY COMPENSATION?
First, equity compensation is not a cash vehicle. As a business owner, you outlay no cash to offer this incentive or compensation. This can be an upside for startups that may be cash-strapped. You may want to put cash into another part of the company, like a new growth initiative or capital expenditure that will improve your position long term, but need to entice talented staff to stay the course while the yields of your investments take shape.
TYPES OF EQUITY COMPENSATION
There are performance shares, stock options and RSUs. Performance shares are awarded in conjunction with meeting benchmarks or performance targets. They are a great way to incentivize or sweeten the deal with executives who have specific metrics to meet, and can supplement cash incentives or be used on their own.
Regular stock options are regular shares of your stock that have an agreed upon “strike price.” You set a purchase price in advance, and your employee has the option to exercise that right at any time to buy stock. These require a vesting period so that employees are incentivized to stay with your company longer term.
Among 325 companies that were surveyed, 72% used RSUs in their executive compensation programs. RSUs usually have a vesting schedule, but as soon as they vest, employees can do whatever they like with them – just as if they bought them like any other stock.
Employees don’t have to exercise the right to buy the shares
Encourages employees to stick with a company for a longer term with a vesting schedule
Negotiating an optimal strike price keeps employees engaged
Employees can sell or transfer the stock when they purchase the stock at vesting time You can build in an expiration date so that the stock has to be purchased by a certain point in time
Less risk for employees
RSUs are always worth something – no strike price to consider
Most used type of equity compensation
Worth full value at time of vesting
Don’t have to pay dividends during vesting period
Save on costs around custody and proxy voting
Granted when a milestone is met
Great to incentivize employees as an add-on or standalone
Usually are not outright shares of stock
Link stock to long-term performance of company
Create strong alignment between employees and the performance of the company Investor-friendly
Deferred compensation is another way to entice executives. Simply put, part of your employee’s pay is held now for disbursement later. If highly compensated and over 50, an employee can take maximum catch-up contributions and substantially reduce their tax burden. Income tax is also deferred for the employee until compensation is paid out – which could be when they retire. If they’re in a lower tax bracket at retirement, they can potentially save on taxes.
Another tool in the executive compensation toolbox
Can result in tax savings for the employee
Can incentivize highly compensated employees
As with all types of compensation packages, there is no one-size-fits-all. Determine your goals, evaluate your options and talk to your advisor about structuring the right plans for your company.
WORK THE PERKS
Here are a few other perks some of the big guys offer. While these may not be applicable to your business, they might spark some ideas in this tight labor market.
“Unlimited” vacation days
Netflix, Oracle and LinkedIn are just a few that offer unlimited vacation days. While it may evoke visions of employees slacking off, the opposite is true. Employees remain accountable to company goals as they are still assessed on meeting their performance targets.
Focus on family – and furry friends
With the “Great Resignation” in the wake of COVID-19 in 2021, more people started to reassess priorities. Family, friends and, yes, even the furry ones began to take center stage. When you think about perks, think about how they could extend to your workforce’s entire family – from dependents to pups. We’re talking childcare, online camps; pet care or pet health insurance; bring your child, grandma or pet to work days – even if it’s just on Zoom; elder care support, activities or meal services; fun meals and recipes the
whole family can cook together; and mental health resources. All of these can make your employees feel like you care and could increase loyalty.
Maintaining self-care, mental health and fitness has become more of a challenge with employees working from home over the past two years. Company-sponsored Zoom yoga or HIIT workouts, self-care boxes filled with anything from healthy snacks to luxurious hand lotion that are shipped to your staff’s homes, and offering mental health resources through an employee assistance program or other service all go a long way toward letting employees know you see them and hear them. Financial wellness programs, too, could help elevate your company’s benefit offering.
As you can see, recruiting and retention strategies take some thought and planning. Here are some things to think about for 2022.
- Take a look at your compensation packages – are they in line with the current market? • Consider adding nonmonetary perks like flex time or flexible vacation days. • Talk to your advisor about different compensation options.
Sources: vlplawgroup.com; forbes.com; HBR.org; eqapplied.com; indeed.com; investopedia.com; execcomp.org; foley.com
Material created by Raymond James for use by its advisors. The information contained herein has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James is not affiliated with any other entity listed herein. © 2022 Raymond James Financial Services, Inc., member FINRA/SIPC. 21-BDMKT-5251 EG 2/22