Stock-based (equity) compensation has become more critical for companies competing for talent, new research shows.
Financial services provider Morgan Stanley at Work's new The State of Equity Plan Management 2022 Report is based on an October 2021 survey with responses from 408 leaders responsible for managing equity plan compensation programs at public and private companies with at least 100 workers. (Private companies may issue stock and have shareholders, but their shares do not trade on public exchanges.) Respondents included chief executive officers, chief financial officers and chief HR officers, among others.
Among the key takeaways in the report:
- The primary purpose of equity compensation is still to attract and retain talent. Nearly 1 in 3 decision-makers (32 percent) said the top goal for offering equity compensation is to attract and retain talent. Nearly half (47 percent) reported their workforce attrition in 2021 was higher than in 2020.
- Scale is critical. Expanding equity to a wider range of employees was the second most popular strategy among respondents when it comes to fighting attrition, after salary raises. Nearly 1 in 3 U.S. decision-makers are looking to expand their equity compensation programs.
- Frequent communication correlates with high engagement. Of the organizations with employees who are highly to moderately engaged with their stock plan, 48 percent are communicating to participants weekly to monthly. At the other end of the spectrum, among employers with low to no engagement, 70 percent are communicating annually or on an ad hoc basis.
- Plan design is evolving. Nearly 4 out of 10 public companies (35 percent) are providing discounts for employee stock purchase programs. Almost one-third of U.S. and Canadian companies (32 percent) are offering shorter and more-flexible vesting schedules that cater to employees' needs.
Equity compensation isn't just for top executives but is "increasing in importance as a key tool in attracting and retaining the best talent throughout an organization," said Scott Whatley, managing director and global head of equity solutions for Morgan Stanley at Work. "Companies can not only get a leg up in the war for talent by updating their equity compensation plans, but also significantly help employees reach their financial goals. Equally important is for companies to … scale these benefits so that all employees—from the junior ranks to the very top—can understand, engage with and ultimately derive satisfaction from the equity."
Private vs. Public Companies
While employee education and administration were markedly similar at public and private companies, there were a few notable exceptions:
- Private companies lag in offering equity to more employees. While equity compensation is a key benefit for companies, just 35 percent of private companies say they provide this benefit to executives and all employees, versus 43 percent of public companies.
- Private companies are not as keen on expanding equity compensation. When asked about initiatives to retain employees during the past year, 48 percent of public companies said they were expanding their offerings to a wider range of employees, versus 35 percent of private companies.
- Cliffs are less prominent among private companies. Cliff vesting is when an employee becomes fully vested in equity awards after a specific period of time, rather than becoming partially vested in increasing amounts over an extended period. Amid new demands for flexibility and greater competition for talent, 63 percent of private companies said they include a cliff, versus 83 percent of public companies.
"As private companies are staying private longer, the need to effectively manage and update their equity plans to evolve along with participant needs has never been more critical," said Jeremy Wright, managing director and co-head of Morgan Stanley at Work's global private markets. "Employees and job seekers have become savvier when it comes to equity compensation, giving private companies and founders a major opportunity to use their equity plans to attract like-minded leaders to help build their businesses."
"Hiring competition, the Great Resignation and stock-price volatility are prompting changes in long-standing stock compensation practices for key performers at big, established tech companies such as Amazon, Apple, and Google," according to a Feb. 14 blog post at myStockOptions.com, an online resource for equity compensation information and tools, including tax issues.
The post provided a roundup of changing equity plans as recently reported by various media, including the following developments:
- Amazon will start making stock grants to employees when they are promoted, instead of waiting until the next annual grant cycle, GeekWire reported. Amazon's announcement said the purpose is "to better align newly promoted employees with the compensation range of their new level."
- Apple informed certain high-performing engineers that they will receive out-of-cycle restricted stock unit (RSU) grants that vest over four years, reported Fortune. The grants, ranging from $50,000 to $180,000, are seen as a retention incentive to prevent defections to tech rivals.
- Alphabet, the parent company of Google, is making larger grants to retain its top talent, with new compensation packages for four senior executives, CNBC reported. In addition, according to Business Insider, Google has shifted to more front-loaded vesting for its RSU grants for all of its employees globally.
A Shift to RSUs
"For the average worker, the perceived benefit of a restricted stock unit award is much higher than that of stock options, fueling a shift in the market where stock options are being phased out in favor of RSUs," wrote Carlene Perry, global head of equity awards at payroll services firm Papaya Global, in a blog post. "With an RSU, generally they will always have value throughout the lifetime of the award while stock options are far more volatile and come with a risk of it being worth nothing by the time you want to or are able to cash out."
For this and other reasons, companies are "moving towards RSUs as their award vehicle of choice or granting stock options as a private company but as they move to go public [then] switching to RSUs," she wrote.
One example is fast-growing software firm GitLab, she noted, which recently announced it will offer RSUs instead of stock options for all future equity grants, for both existing and new employees.