Equity Compensation
Candlefocus EditorUnder equity compensation, a company may provide individuals working for them with options, restricted stock, and performance shares which offer them a share of ownership in the company. For employees, this offers a form of compensation that is directly linked to the success of the company, and rewards them for continued exemplary performance.
The most common type of equity compensation is stock options, which can be offered in varying degrees. Non-statutory stock options (NSO) are typically offered to most employees in a company, while Incentive stock options (ISO) are most often reserved for senior executives and key personnel. Some companies also recognize a separate class of stock options, known as restricted stock options. These are typically reserved for executives and executives-in-waiting that the company wishes to incentivize with equity.
Companies also make use of performance shares, which are a type of equity compensation where the employee is awarded a percentage of the company’s stock as a reward for achieving certain targets. Performance shares are usually awarded on a vesting schedule, meaning the employee has to meet specific goals or milestones in order to unlock an additional percentage of the performance shares.
Finally, some companies offer restricted stock as part of their equity compensation plans. With restricted stock, the company grants awards of shares that the employee is not allowed to sell for a certain period of time. Restricting the sale of the stock gives the company more control over the stock and may be used to tie performance to stock appreciation.
In some cases, companies may choose to offer a sub-market salary along with equity compensation. This is especially found with startup companies where the potential to reap large rewards in the future is bigger, but the company may not be in the position to offer competitive salaries at the moment.
Equity compensation offers an important and unique benefit to companies, as they are able to offer attractive pay packages and incentives to employees without taking a major hit to their liquidity. For employees, it provides a chance to benefit from their skills and efforts by sharing in the long-term growth and success of the company.