Running an Equity-only Cycle to Conserve Cash Budget

3 min read
Apr 22, 2020 8:35:00 AM

Compensation cycles have been largely disrupted for many organizations in the first half of 2020. You may have completed them on-schedule and adjusted payroll to account for raises, only to implement pay cuts a short time later. You may be among the 12 percent of organizations that have reduced or delayed salary increases, or the additional 22 percent that have planned or considered them. Or, like 17 percent of organizations, you may have cancelled all salary increases in 2020. Any and all of these scenarios may impact employee morale, which can lead to low engagement and retention.

While the economy is projected to rebound later this year, your organization may not be ready to lift wage freezes or run standard compensation cycles just yet. This may further impact employee engagement and retention at a time when companies depend on their workforces to help them recover. If your company uses stock grants as part of their compensation package, you may want to consider rewarding employees through an equity-only cycle.

Consider smaller equity grants and wider distribution

In normal business cycles, performance and retention based stock cycles are commonly used to retain successful employees. Organizations might give employees a “refresher” grant of 25 to 50 percent of what they would offer that person for their position today, incentivizing them to stay to continue vesting company stock In addition, companies frequently offer additional discretionary grants to top performers, guided by the employee achievements and feedback from leadership.

In a one-time equity-only cycle, companies use stock as a proxy for cash raises, and the distribution is widespread. Offering every employee more of a stake in the company demonstrates that you value them, and that you’re truly all in this together. This can boost employee engagement while your company works to recover from the economic downturn.

The size of your equity grants may depend on a number of variables. Your organization may account for 5 percent annual dilution, and a hiring freeze may provide a nice pool to work with. Consider what your hiring plan might look like for the remainder of the year, and what you need to set aside for new hires. Additionally, some employees may have recently left the company, putting unvested shares (or unexercised options) back into the pool. See what you have to work with, and make a plan to divide it up. It’s ok if the individual receives a small grant compared to when they were hired; people understand that times are tough. Just be sure to communicate what you’re doing so everyone is on the same page.

Use a point system to gather manager recommendations

A typical refresher cycle is often driven by Finance, using performance and tenure to guide the size of grant for a given employee. Instead of approaching this using only historical performance and tenure, treat this more like a regular compensation cycle. Get feedback and participation from your managers to account for recent performance, so you can reward people according to their contributions.

Give each manager, or managers-of-managers, a budget and let them distribute it among their reports as they see fit. You can simplify this process by allocating a point budget to each manager, rather than giving managers a count of the shares that are going out. That is, give each manager 100 points to distribute, and then let HR and Finance use that for input to award stock options. This lets managers give feedback without implying that their recommendations are the only factor being used to make distributions.

Make adjustments through your existing approver chain

Just as you would with a normal compensation cycle, allow for adjustments to be made through your existing approver chain. This may include a budget for strategic adjustments from HR, as well as holdbacks for directors and Vice Presidents.

You may want to adjust manager recommendations to account for:

  • Deeper pay cuts: Some companies are implementing tiered pay cuts, where higher-paid employees experience deeper cuts than low-wage employees. It may be appropriate to make up for those deeper pay cuts with additional equity.
  • Mission-critical roles: There may be some roles—or some people—your company would struggle to operate without. Those warrant a higher allocation to reduce the potential of voluntary turnover.
  • Hazard pay: If your company has roles that are incompatible with remote work, you may choose to offer additional stock options as a form of hazard pay.

As usual, run final recommendations through Finance to triple-check, audit, clean up, and approve everything before it’s shipped.

Final thoughts on running an equity-only cycle

This economic downturn isn’t going to last forever. Taking care of your employees and showing them appreciation, in whatever way you can, helps build long-term employee engagement and retention. While you may not have the cash or the long-term insights to offer bonuses or raises right now, an equity-only cycle is a show of good faith and commitment to your company’s most important resource–its people. As the economy opens back up, and companies begin hiring again, you want to make sure that your employees will stay on-board to help you reach your goals.

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