Equity Compensation

Why Equity Compensation Works So Well For Employers And Workers

Equity compensation has emerged in recent times as one of the most effective ways for companies to reward the efforts of key personnel. There is no risk to the company, because the options will never be exercised unless the share price rises on the back of a good profit performance, yet the benefits to the worker outweigh those of a quick cash advance. There can be tax breaks built in, either for the company or the worker, depending on how the investment is structured. For the worker, the system provides a sense of belonging and ownership as well as an incentive to stay and build a career.

Companies are forever in need of ways to attract good workers, especially in key positions where the choices made will have a profound impact on long term profitability. Offering stock in the company, or at least the option to buy stock, has proven to be one of the most effective incentives. This can be done in the form of a stock option, which delivers the right to buy stock in the future at a price determined at the start, or it can be in the form of restricted stock purchase which will always deliver some value unless the company becomes bankrupt.

One of the greatest benefits of offering stock options is that there is no requirement for immediate cash outlay. The company can simply offer the option to buy stock at the start, including when a new company is formed, and any take up will depend largely on the performance of the company share price. If the performance is disappointing, the option price will remain above the share price, so no-one will exercise the option.

The benefits of equity compensation to the worker are similar in a way, because there is no risk involved in receiving a stock option. If the share price performs well, you can then decide to exercise the option and buy the shares. At that point, you have the option to sell immediately at the higher market price for a quick profit. While this may be tempting for many, it is rarely the best choice to make.

If you are able to forgo the quick influx of cash, you can use the stock you have as the basis for a new investment program including other options and shares. You can sell a part of your holding if you believe that there is another stock which is likely to rise faster. If you set a stop loss below the current market price, you can cut your potential loss down while still allowing the upside to be unlimited. You can even borrow against your assets to invest in other things. There are far more options than many people consider when it comes to equity compensation.

 

 

 

 

 

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