An equity incentive plan offers employees shares of the company they work for as supplemental compensation, which is awarded through stocks, warrants, or bonds.
Equity incentive plans help smaller businesses with tight budgets incentivize employees with supplemental rewards. Employees help build company value and, in return, benefit from the company’s growth. Equity incentive plans also align employees with their company’s interests and values.
Businesses often offer employees equity incentive plans when they are in the early stages and might not have steady finances or a hefty compensation budget. Companies may also extend shares or units in an equity plan to partners, advisors, directors, or contractors.
Common forms of equity compensation
Employers can typically offer their employees different types of equity. Equity compensation comes in many forms, including the following:
- Restricted Stock Awards (RSAs): RSAs grant employees company stock with some restrictions. Stocks typically follow a specified vesting schedule or liquidation event, and employees cannot sell until the shares vest.
- Restricted Stock Units (RSUs): RSUs promise an employee common company stock based on certain vesting conditions. These conditions typically pass a specific time or vesting period. Employees rarely have to pay for RSUs, but they do not own the shares until the vesting period ends. RSUs do not include shareholder rights or pay dividends.
- Phantom Units: Phantom units, also known as shadow equity, follow a company stock’s actual price movements and pay out cash instead of shares. Phantom units give employees similar benefits as stock ownership without granting them company stock.
- Incentive Stock Options (ISOs): ISOs are statutory stock options for companies in the United States. ISOs are qualified awards and provide specific tax benefits to U.S. workers. Employees pay no tax when they receive or exercise the grant, but the employee pays capital gains when they sell the stock.
- Nonqualified Stock Options (NSOs): NSOs allow employees the right to purchase company stock at a predetermined price. NSOs are a substitute for some cash compensation employees earn from their employment. Employees pay income tax on the difference between the options price and the stock value.
- Stock Appreciation Rights (SARs): SARs are linked to the value of the company stock over a specific period. Employees can exercise their SARs after the vesting period. Employees do not pay the exercise price and receive the sum of the increase in the stock value in shares or cash payment.
- Performance Share Units (PSUs): Employers grant PSUs to employees based on the company’s performance. The number of shares an employee receives depends on key performance metrics and is graded with multiple vesting points relative to the company’s overall performance.
Benefits of offering equity incentive plans to employees
Equity incentive plans help attract, retain, and incentivize employees. An equity incentive plan is a valuable component to include in an overall employee compensation package due to the following benefits:
Improves talent retention
Global talent wants comprehensive compensation packages, and many job candidates actively seek equity incentives. Companies offering supplemental benefits, such as equity incentive plans, stand out to top talent. Equity incentives attract valuable talent and are a key strategy for talent retention.
Improves talent engagement
Equity incentive plans offer employees company ownership, and a workforce with company equity is more likely to feel invested in the business and its success.
Vesting schedules are also often linked to an employee’s time with a company or the company’s performance in order for the equity holder to receive the award’s full benefits. As a result, equity incentives encourage a dedicated workforce to stay long-term and grow with the organization.
Helps businesses stay competitive
Smaller businesses don’t always have large salary budgets, and equity incentives help startups bridge the compensation gap. With job candidates worldwide actively seeking comprehensive compensation and global benefits packages, equity incentives help companies stay ahead of the competition to recruit the best workforce anywhere.
Helps businesses save money
Employee salaries often take up the largest percentage of a company’s budget. Equity incentive plans help businesses save money by offering employees lower wages in exchange for equity compensation. Equity incentive plans help smaller companies and startups attract quality talent and potential investors when they need time to develop and grow.
How to offer equity incentive plans to global talent
Despite the benefits, companies face many challenges when offering equity to employees—particularly foreign talent.
Not only is researching and developing an equity incentive plan daunting and time-consuming, but determining the best plan for your business depends on various factors, like company goals, business structure, business size, finances, and talent location.
Companies seeking to offer equity and stock options to foreign talent must also consider different tax obligations worldwide and prepare to offer and administer global equity awards compliantly. Employers must adhere to foreign tax laws and understand how equity compensation impacts foreign employees’ classification, tax filing, and reporting requirements.
Many companies opt to work with an expert to simplify the process of offering equity to international talent. A global partner such as an employer of record (EOR) is well-versed in international tax and employment laws and helps eliminate noncompliance risks and penalties.
An EOR partner like Velocity Global helps you navigate equity plan costs, tax obligations, and compliance requirements and develops and administers locally tailored, competitive, and compliant global equity incentive plans for your distributed workforce.
Learn more in our free guide: How to Offer Equity Awards That Global Talent Loves
Disclaimer: This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. You should contact your attorney or tax advisor to obtain legal and/or tax advice with respect to your particular situation. Only your individual attorney or tax advisor can provide assurances that this information—and your interpretation of it—is applicable or appropriate to your specific situation. All liability with respect to actions taken or not taken based on this information is hereby expressly disclaimed. All content is provided "as is" and Velocity Global makes no representations or warranties concerning this information.