Equity compensation is the next hot benefit, Morgan Stanley says
Equity compensation isn’t just for Silicon Valley startups anymore — it’s for employers who want to attract and retain the best talent, Morgan Stanley executives say.
More employers are starting to recognize the value of these benefits: 77% of employers are currently using digital stock certificates, according to the 2020 State of Equity Plan Management at Private Companies survey conducted by Shareworks — an equity benefit platform by Morgan Stanley at Work. When asked why they were offering employees company equity, 36% of executives said it was mainly to “attract and retain talent,” the survey said.
“Equity is one of the most powerful ways to attract and retain talent because it aligns employees’ financial interests with those of the company,” says Jeremy Wright, co-head of private markets at Shareworks by Morgan Stanley. “Companies would do well to make it available to their entire employee base, not just executives.”
Major tech companies like Instacart and Stripe offer equity compensation through Shareworks by Morgan Stanley, but so do long-established companies like Levi Strauss and Whitepages.
Wright says equity compensation is one of the few employee benefits that can actually increase work performance. With retirement benefits, like the 401(k) and others, employee money is invested in other companies; employees have no control over the performance of their shares — they can only sit tight and hope for the best. But with equity compensation, employees receive a stake in their own company — their hard work can actually help drive up the value of their shares.
“The return the individual receives is directly correlated to the success of the business,” Wright says. “Giving employees this benefit allows them to focus on building innovative, successful companies. The reward is like a pot of gold at the end of the rainbow.”
It takes time for employees to reap the fruits of their labor with equity compensation. Using an IPO, employers set a vesting schedule — the amount of time it takes for employees to receive a payout from their shares. Wright says it’s typical for employees to wait four years before receiving a payout.
“Let’s say, for example, I give you 1,000 shares on the day you join the company that will vest over a four-year time period,” Wright says. “If you work for the organization all four years, you’re entitled to those 1,000 shares. It gives employees an incentive to commit to the company for that length of time, and potentially long-term.”
Equity compensation also allows employers to offer a benefit that addresses various financial wellness issues. Once employees receive a payout from their company shares, they can literally use the money for anything they want — buying a house, paying off student loans or credit card debt, saving for retirement, etc.
“In a changing business landscape and a world of economic uncertainty, it is becoming critically important for companies to engage and motivate employees to help shape their future and create the financial lives they want,” says Marcos Lopez, co-head of Morgan Stanley at Work.
Wright says employers who are considering offering equity compensation to their workforce need to consider three things: digital platforms, employee communication and regional tax laws.
With companies allowing employees to work remotely during the pandemic, many are choosing to uproot and move to different parts of the country. Wright says companies with employees all over the country need to make sure they’re in compliance with local taxes.
“That could have long term impacts on the work internal departments need to do; HR departments should talk to tax consultants to ensure compliance,” he says.
While 80% of employers either have, or plan to enroll in, a digital equity benefit management platform, Wright says there are still programs out there that rely on Excel spreadsheets — not the most efficient method for tracking and reporting share values, or communicating with employees he says.
“You should really look for a platform that’s going to streamline the process and make it easy to track,” Wright says. “You also need something that’s going to help communicate the value to employees and allow them to see how the shares are progressing — that’s going to be a real incentive.”