Equity-based compensation has been considered a cornerstone of the successful compensation strategies of many companies in the U.S. Such plans align employees’ interests with those of shareholders in a scheme of shared success. However, such plans’ many advantages indeed come with common problems.
It’s time to outline various common problems and their solutions for HR professionals.
Understanding Plan Complexity
One of the major problems with these employee equity plans is their inherent complexity. The plans’ arrangements usually include stock options, restricted stocks, and performance shares. As each type comes tagged with its definite set of rules and tax implications, it may be hard for employees to understand them consistently. In their state of confusion, employees make mistakes and mismanage such programs; thus, they do not know how to handle this confusion. HR professionals need to make communication simpler and put resources in place to educate and demystify such plans for the workforce.
Valuation Challenges
Another serious challenge is ensuring that the values of equity options are correctly ascertained. The value of stock options or shares may change with market forces, making it difficult for employees to ascertain their value correctly. Overvaluation may lead to disgruntled employees feeling overburdened. Organizations should apply transparent valuation mechanisms so that employees know how their equity is valued. Continuous information and training meetings may be held to abate this.
Regulatory Compliance
A good employee equity strategy must navigate regulations. The SEC (Securities and Exchange Commission) and other regulatory authorities impose strict rules on organizations. Noncompliance risks legal consequences and sanctions for the company. HR professionals should work with in-house or outsourced legal counsel, who should be aware of equity plan legislative changes.
Vesting Schedules and Retention
While the schedules intend to encourage employee retention, they can backfire when not appropriately designed. Employees get frustrated by long wait periods and eventual payable amounts, leading to demotivation and disengagement. Companies should balance their holding periods with retention and allow employees flexible vesting schedules. This move ensures that employees are content and loyal to the company.
Communication Gaps
Effective communication plays a crucial role in the success of employee equity plans. Communication issues, misunderstandings, and a lack of knowledge cause employee unhappiness and distrust. HR professionals should communicate every equity plan detail clearly and consistently. Regular updates, workshops, and Q&A sessions can bridge communication gaps.
Tax Implications
Taxation is what most complicates equity compensation for many employees. Different equity forms are taxed differently, and employees may not understand their tax obligations. HR professionals should explain clearly what this may entail and offer to assist in workshops or have access to tax advisors, or else some of these errors may be very costly for employees.
Leveraging Equity Management Software
Manually managing employee equity plans involves a lot of time and is susceptible to many errors typical of any manual process. Equity management software will automate such a process, minimizing errors while generally improving the employee experience. This equity software also automates calculations and carries out detailed disbursal and vesting schedules, making information on employee equity available to employers at their fingertips. That means HR works on strategic initiatives, not administration.
While employee equity plans create value, they face a series of challenges a company must be prepared to deal with. There are solutions to these: managing complexities, ensuring compliance, and employing technologies. Effective communication and education create a supportive atmosphere where workers understand their equity compensation.
