Younger Employees Face Rewards, Risks in Stock Compensation Plans

Generation Z and Millennials value equity in their employer but should diversify their assets

Stephen Miller, CEBS By Stephen Miller, CEBS September 16, 2019
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Millennials and Generation Z employees value participation in their employer's stock compensation program, a new survey shows, but they need to be mindful of investing too much of their savings in the company that employs them.

Stock compensation—also called equity compensation or share-based compensation—is a way of paying employees beyond their salary and bonus with ownership in the business, typically through time-restricted shares or stock options, which are subject to vesting periods before they can be sold. The amount of equity that employees are eligible to receive is usually based on their position and tenure, and the goal is to align employees' interests with the company's success.

Stock compensation plans share similarities with but also differ from variable pay programs that reward workers with their employer's equity as long-term incentive payouts when certain goals are met, and from employee stock purchase plans that allow employees to contribute part of their salary to buy company stock at a discount.

"Once reserved for the C-suite, equity compensation has become a driving factor for Millennials and Generation Z employees when considering new career opportunities," said Craig Rubino, vice president at E*Trade Financial Corporate Services. The firm's latest survey, conducted in April with responses from over 60,000 stock compensation plan participants, found that:

  • More than half of respondents under age 35 (57 percent) said stock plan benefits are an important consideration when changing jobs, compared with 46 percent of their Baby Boomer counterparts.
  • When asked why they hold on to shares instead of selling them once they can, 35 percent of young participants said it's because they believe in the company's future performance, compared with only a quarter of their colleagues age 55 and older.

"The younger generations that make up today's workforce want to feel connected to their company and participate in its growth potential," said Scott Whatley, president of E*Trade. A decade ago, benefits like stock compensation "were not nearly as top of mind and were reserved solely for executives."

However, only 25 percent of young participants understand how taxes may impact their benefits, compared with 38 percent of Baby Boomers, the survey showed.

Millennial and Generation Z participants also are interested in more educational information from their stock plan administrators, with 57 percent indicating they would like more educational guides and FAQs compared with just 45 percent of Baby Boomers.

"Equity compensation is an inherently complex benefit," Rubino noted. "So as younger employees place greater value on equity, they need education and tools to help them realize the full potential of their benefits."

Demystifying Stock Compensation

To successfully put a stock plan in place, Rubino advised, benefit managers should:

  • Solicit feedback. Get the right decision-makers on board from the start, from finance and accounting to human resources and legal. Also, consider conducting formal or informal focus groups to collect input on what types of benefits participants want and how they prefer to receive information.
  • Keep in constant contact. Ongoing, customized communications that include easy-to-understand terms as well as metrics and visual aids help participants recognize not just the value of their stock plan benefits but also how they can actively contribute to their company's performance.
  • Use digital tools but don't lose the human element. Offering a combination of "live" and digital tools such as 24/7 customer service, personalized alerts, on-demand seminars, live trainings, and online multimedia and mobile content allows participants to access information in ways that work best for them.
  • Look at your peers. Understand what similar organizations are doing and stay on top of industry compensation trends.

[SHRM members-only toolkit: Designing and Managing Incentive Compensation Programs]

Too Much Employer Stock

A survey last year by financial services firm Charles Schwab found that among employees who participate in an employer-sponsored stock compensation plan, employer stock makes up a significant portion of their net worth, especially among younger employees.

The survey showed that stock compensation, on average, accounts for 29 percent of plan participants' net worth, and 42 percent of Millennials' savings.

Millennial employees also had a greater share of their net worth in equity compensation than their Generation X and Baby Boomer counterparts (42 percent, compared to 24 percent and 19 percent, respectively). Maintaining a high proportion of company stock may be a conscious choice, as almost three-quarters (73 percent) of employees surveyed also owned company stock outside of their equity compensation plan.

Because it can be risky for employees to tie up too much of their net worth in their employer—employees lost their jobs and much of their savings as a result of Enron's and others' bankruptcies, for example—financial advisors often recommend having no more than 10 percent to 20 percent of an investment portfolio in an employer's stock.

"For some investors, too much company stock can be too much of a good thing," said Marc McDonough, senior vice president at Schwab Workplace Financial Solutions. "It's clear that employees value their equity compensation as a major driver of wealth, but they must also appreciate how important it is to diversify," he noted.

He advised employees to ask for professional help to integrate their stock compensation into their overall financial picture.

Observed E*Trade's Rubino, "Stock compensation is complex and certainly has its hurdles, but when done right, it can drive real value for both the employee and the organization."


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