How to leverage transparency in equity compensation to drive employee engagement?

Financial security and growth potential significantly influence workplace morale. Stock-based compensation can address this need while helping companies preserve cash flow.

Stock compensation provides employees with opportunities to benefit from the company’s growth and aligns their interests with the business’s performance. However, employees often struggle to value these benefits accurately. Stock options, stock appreciation rights (SARs), and other forms of stock-based compensation are complex assets that make valuation challenging without detailed company information.

This perception gap can limit the motivational impact of equity compensation, as employees may not fully appreciate the potential value of their stock-based benefits.

In this article, we will explore this idea more deeply. We will first establish how stock-based compensation drives employee engagement. Then, we will discuss how transparency can enhance the power of stock-based compensation to improve employee engagement. Read on to know more!

How does stock-based compensation drive employee engagement?

When a company only issues cash compensation, employees tend to view work primarily as a means for survival. In such environments, they would not feel motivated to go beyond their basic responsibilities and are often content with maintaining the status quo.

When this is introduced, the mindset of employees shifts from short-term survival to long-term wealth creation. This phenomenon drives employee engagement in the following manner:

Ownership mentality

When an employee owns stocks, or even stock options, they are likely to think and act like owners. In contrast, when an employee only earns a fixed cash salary, they may limit their efforts to the extent that they outdo their competition and earn their salary. But an employee who owns stocks of their employer will consider how their actions impact the company’s growth as a whole.

Such employees are likely to take accountability for their actions, report their mistakes, and take corrective measures. Stock-based compensation also encourages employees to take initiative and collaborate with team members to maximize value creation.

Aligns employee goals with company objectives

Stock-based compensation represents a rare opportunity for individuals to participate in private equity, a high-growth asset class. While stock market investments may provide an annual return of about 10%, private equity investments can potentially achieve higher annual returns.

Thus, stock-based compensation allows employees to meet various financial goals faster than expected.

From an employee’s perspective, one of the things that can boost the value of such compensation is their own performance. So, employees will have a direct incentive to contribute more to their company.

Employee retention

Typically, stock-based compensation vests over a schedule extending over a number of years. For instance, a stock-based compensation plan may include a 1-year cliff and a 4-year vesting period. To gain the full advantage of such a plan, an employee must remain at their company for at least 5 years. Thus, issuing this can reduce your attrition rate.

Furthermore, 23% of employees believe that equity compensation helps them meet long-term investing goals such as retirement. As a result, offering equity can increase employee retention by reinforcing the belief that staying with the company will help secure their financial future.

Shared success

Founders who are on the verge of key milestones often feel frustrated about their employees not putting in an equivalent effort. They worry that this misalignment could stall company growth and delay critical achievements by months or even years.

In such situations, the key issue is that the company’s success has little to no bearing on the employee’s fortunes. Hence, the incentive for an employee to go the extra mile is much lower than that of a founder. This helps resolve this imbalance in incentives.

As key milestones appear within sight, employees who receive stock-based compensation are likely to put in extra efforts willingly.

Recruitment advantage

Stock-based compensation can be a highly effective tool for attracting talented and highly motivated employees, especially for startups. In challenging situations, organizations must infuse talent without straining cash reserves significantly. But soliciting a desirable employee without offering a higher package is nearly impossible.

You can solve this paradox by offering stock-based compensation. You could even offer less cash compensation than what their current workplace offers, and more than make up for this by the growth potential of your company’s equity.

By offering a stake in the company’s future success, equity serves as both a financial incentive and a symbol of trust and partnership.

How does transparency enhance the relationship between stock-based compensation and employee engagement?

Implementing transparency in equity compensation has several key benefits that strengthen organizational culture and employee morale. Some of these key benefits are as follows:

Clarifies the value of equity

Private companies do not make the kind of disclosures that listed companies are required to make periodically. As a result, understanding the value of a private company’s stock is much more difficult than understanding the value of a public company’s stock. To ensure that employees truly appreciate the value of stock-based compensation, you must strive to make timely disclosures about key events and developments that affect your company’s valuation.

If operating in stealth works to your company’s advantage, you must require your employees to sign non-disclosure agreements (NDAs) when they participate in stock-based compensation plans.

Builds trust

When an organization is transparent about its equity compensation, it helps build trust in its broader commitments to employees. While equity is one motivator, employees also value benefits like paid time off, promotions, and wellness support.

However, if they sense inconsistency, favoritism, or fear retaliation, employees may hesitate to use these benefits. This can occur even when employees are entitled to these benefits under employment agreements. Over time, this would erode morale as employees lead less fulfilling careers and become disengaged with the company.

Reinforces fairness

Disparities in stock-based compensation among employees at the same level or position can affect employee morale and trigger detrimental internal politics. Such negative effects are felt even when details are kept secret. In such a scenario, employees are likely to speculate and overinterpret subtle cues or conversations, leading to mistrust and unnecessary conflict.

Interestingly, many companies already offer stock-based compensation using standardized, non-discriminatory plans called ESPPs for tax and regulatory reasons. So, to prevent employees from speculating, you must be transparent about how equity is being offered at your company.

Eqvista – Your complete Equity Transparency Partner

To truly leverage the potential of stock-based compensation, you must enable your employees to investigate and realize the value of such compensation. A key step in doing so involves providing a dashboard that can help employees understand the value of their holdings and make sound equity decisions.

Instead of building such a dashboard from scratch, consider relying on Eqvista, an equity management software trusted by over 20,000 companies. Contact us to get a demonstration of our platform!