BENEFITS

Mature BusinessBENEFITS

  • Back to quick summary
  • Compensating Key Employees

    Game Plan

    In-Depth

    Arranging Equity Participation

    Employee retention can be enhanced through equity participation. There are many ways to provide this additional compensation, often through some form of deferred compensation. Employee ownership of shares is just one possible arrangement. Other options include sharing in the appreciation of the company’s value over time without actually owning stock.

    Stock options

    The issuance of stock options is a popular way for employees to reward and motivate key employees. See the separate section on “stock options” (above) for more details. While employee stock ownership can be very effective as an employee retention and motivational tool, there can also be restrictions and complexities to compensating employees with equity. These are particularly true for privately held companies.

    Phantom stock/stock appreciation rights

    There are a number of ways to reward employees without involving them as partial owners of the company. Phantom stock and a stock appreciation rights program are ways to provide an owner-like benefit to employees without having them actually own stock.

    These plans pay employees the equivalent of an increase in the company’s stock value without actual ownership attached. The award is based on the difference between the stock’s value on a specified date and its current value. This can be advantageous: Employees are rewarded for company success without incurring tax obligations or being concerned about legalities associated with ownership.

    Varied approaches to stock ownership

    There are many more ways that ownership of company stock can be spread among a much broader base of employees, not just among an elite group of “key employees.” These include:

    • Stock awards. These grant immediate ownership of stock.
    • Restricted stock units. Call for stock to be issued in the future, as long as conditions such as continued employment are fulfilled.
    • Stock purchase plans. They allow a broad group of employees to purchase stock.
    • Employee Stock Ownership Plans. Stock ownership is shared broadly among company employees.
    Game PlanGame Plan

    Game Plan

    • Plan carefully to make sure you don’t expose key employees to unintended or unnecessary tax liabilities.
    • Consider what type of equity participation would be most beneficial to both the company and its key employees.
    • Talk with a compensation consultant, your accountant and/or your attorney before implementing a stock ownership plan of some kind.