Simplifying the Complex World of Employee Incentive Plans
By Kathryn L. Hickey, Partner, PilieroMazza PLLC
“How do I keep my employees from leaving? Talent is so hard to find and retain!”
These are comments we hear all the time from clients struggling to compete for talent in a pool that is growing ever more competitive. It can be overwhelming and confusing to consider the many options available—cash bonus plans, broad-based qualified plans, stock options, restricted stock, stock appreciation rights, phantom stock. Which is right for you and your company?
The key point to keep in mind when selecting incentives is that there is no magic combination, and you are not wedded to any single option. A combination of short- and long-term incentives of differing styles can be used to achieve the three goals of employee recruiting, retention and motivation.
Crafting Irresistible Incentive Compensation Plans to Retain Talent & Inspire Growth
Most employers understand short-term cash bonuses (annual, performance based) and qualified plans like a 401(k). Where we see the most confusion is around equity or synthetic equity plans.
- An equity-based plan is one in which employees receive a true equity stake in the company (think stock options, restricted stock or profits interests). At the most basic level, equity based plans tend to emphasize the goal of long-term retention and performance because they typically provide a payout upon a sale of the company or other liquidity event. Keep in mind that these plans can also be used to motivate short-term performance goals if they incorporate vesting milestones tied to performance criteria. Some employers feel pressure to provide true equity, which is often very effective and easily understood by employees.
- Synthetic equity plans are plans in which employees receive an economic benefit that has a value based on the underlying value of a share of equity in the company (like stock appreciation rights (SARs) and phantom equity). If you can successfully communicate the potential value of a synthetic equity plan, that can be attractive because it keeps employees off the true cap table, freeing up that equity for potential investors or strategic partners while still enabling employees to share in the upside of long-term growth.
It’s worth the effort to understand the nuances of the various types of equity-based incentive plans before settling on one. Once in place, these plans can be fairly simple to administer, but it can be a hassle to undo a plan once awards are outstanding. As always, consult with your legal and tax advisors before putting a plan in place. At the end of the day, knowing your team, building trust, and sharing in the value of the company can motivate everyone to contribute towards growth.
Discover additional ways human resources leaders are getting creative in terms of “sweetening the pot” to keep key employees during the webinar Crafting Irresistible Incentive Compensation Plans to Retain Talent & Inspire Growth. This session is part of the expert series Navigating No-Man’s Land: From Small Business Set Asides to Full & Open Competition with Deltek partner Aronson, LLC.
About the Author
Kathryn Hickey is a partner with PilieroMazza PLLC and chairs the business and corporate law group. Ms. Hickey concentrates her practice primarily in general business, mergers and acquisitions, venture capital investments, and commercial contracting. She regularly counsels companies on a wide range of legal issues, including entity formation and structure, corporate governance, employment issues, commercial leasing, licensing and regulatory compliance.
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