Equity Compensation
What Is Equity Compensation?
Equity compensation is non-cash pay that is offered to employees. Equity compensation might incorporate options, restricted stock, and performance shares; these investment vehicles address ownership in the firm for a company's employees.
Equity compensation permits the employees of the firm to share in the profits through appreciation and can support retention, especially in the event that there are vesting requirements. On occasion, equity compensation might accompany a below-market salary.
Figuring out Equity Compensation
Equity compensation is a benefit given by numerous public companies and a few private companies, especially startup companies. As of late sent off firms might lack the cash or need to invest cash flow into growth drives, making equity compensation an option to draw in top notch employees. Generally, technology companies in both the beginning up phase and more mature companies have utilized equity compensation to reward employees.
With equity compensation, there will never be a guarantee that your equity stake will really pay off. Rather than equity (or in combination with equity compensation), being paid a salary can be beneficial in the event that you know precisely exact thing you're getting. There are numerous factors that can impact your equity compensation.
Types of Equity Compensation
Stock Options
Companies that offer equity compensation can give employees stock options that offer the right to purchase shares of the companies' stocks at a predetermined price, likewise alluded to as exercise price. This right might vest with time, permitting employees to gain control of this option in the wake of working for the company for a certain period of time. At the point when the option vests, they gain the right to sell or transfer the option. This method urges employees to stick with the company as long as possible. In any case, the option commonly has an expiration.
Employees who have this option are not viewed as stockholders and don't share similar rights as shareholders. There are different tax results to options that are vested versus those that are not, so employees must investigate what tax rules apply to their specific circumstances.
Non-Qualified Stock Options (NSOs) and Incentive Stock Options (ISOs)
Extra types of equity compensation incorporate non-qualified stock options (NSO) and incentive stock options (ISOs). ISOs are simply accessible to employees (and not non-representative directors or advisors). These options give special tax benefits. For instance, with non-qualified stock options, employers don't need to report when they receive this option or when it becomes exercisable.
Restricted Stock
Restricted stock requires the completion of a vesting period. Vesting might be done at the same time after a certain period of time. Then again, vesting might be done similarly over a set period of years, or whatever other combination that the management of a company sees as suitable. Restricted stock units (RSUs) are comparative, yet they address the company's guarantee to pay shares in light of a vesting schedule. This offers a few benefits to the company, yet employees gain no rights of stock ownership, like voting, until the shares are earned and issued.
Performance Shares
Performance shares are granted provided that certain predefined measures are met. These could incorporate metrics, for example, an earnings for each share (EPS) target, return on equity (ROE), or the total return of the company's stock comparable to an index. Commonly, performance periods are over a long term time horizon.
Features
- Equity compensation is non-cash pay that is offered to employees.
- Equity compensation is a benefit given by numerous public companies and a few private companies, especially startup companies.
- On occasion, equity compensation might accompany a below-market salary.
- Equity compensation might incorporate options, restricted stock, and performance shares; these investment vehicles address ownership in the firm for a company's employees.
