Specific ways to use equity compensation for attracting and retaining the top people your business needs to flourish.
I wrote last month about how to position your company so that you can attract and retain top performers. how to buy shares in facebook One very effective way to do both is to compensate your key employees with equity.
Performance-based pay is a key factor in retaining top talent. Combine it with ownership and a stake for the future of your business and you have a powerful incentive.
That is what equity does. The basic theory behind equity compensation is simple: generously pay your people in the future, with the financial value they help create, and make it very expensive for them to leave. This article will look at three different ways to achieve this.
Why not use other compensation options such as profit-sharing or performance bonuses? Both bonus and profit sharing plans tend reflect past period performance, rather than current and future endeavors, which is where you want your people's attention. Once paid, they cannot be increased by any amount of hard work, creativity or imagination. Bonuses and profit sharing are typically one-time payouts, which in today's what-have-you-done-for-me-lately atmosphere are quickly forgotten. Profit sharing is only possible if there are profits. Bonuses require cash. In a rapidly growing company, either (or both) of these may be in short supply.
Equity addresses these shortcomings. Equity is the bonus that keeps on giving. Equity compensation will likely increase in value over time. Equity acknowledges your employee's past contribution, but its real payoff is for work still to be done - and your people have to stay around to reap the rewards. In real terms, the current cost of equity compensation is cheap, especially relative to the loyalty it can purchase. Since no money is exchanged at the time of an equity bonus, it can be used as a reward, even if you are in a cash-strapped company.
Equity has other benefits. Especially if your business is likely to go public or be acquired, equity helps top talent choose between your smaller company and job offers from larger, well-heeled public companies. Also, equity highlights and underscores the common interests between your company's owners and the "rank-and-file", and helps top performers feel like the business is theirs.
Stock grantsare easy to implement. Your company grants a key employee a specific number of shares, the value of which is the total company value divided by the number of outstanding shares. That's it. More than any other form, shares are tangible. Stock makes your key people feel like owners, and when people really see themselves as shareholders they rarely want to leave.