I’ll Gladly Pay You Tuesday for Your Services Today
Executive Compensation . . . you can’t open your eyes or ears nowadays and not hear something juicy on this topic. However, far from the typical Executive Compensation discussions of the day, lays a far less scandalous, but more relevant topic to consider. How can you fairly compensate your employees and, in fact, motivate them to work harder in these recessionary times. Fear of losing their job? I prefer the carrot rather than the stick approach. Perhaps it’s time to think slightly out of the box and motivate your team to succeed through alternative compensation methods rather than beat them into submission with pay-cuts and lay-offs.
Below are three alternative methods of compensating employees that may offer just the right combination for your business to motivate and score in these tough, but opportunistic times.
Stock Options. At their core, stock options are essentially rights granted by an employer to purchase stock at a stipulated price over a specific time period. They generally come in two types, Incentive Stock Options and Non-Qualified Stock Options. Incentive Stock Options are more restrictive because they offer significant tax benefits to the employee. Stock options are a great tool to provide long term incentives to employees in a growing business with a liquidity event somewhere on the horizon because they allow employees to share in the growth and success of the company as if they were a shareholder.
Restricted Stock. Restricted stock is generally a grant of stock to an employee, with the stock being subject to restrictions as to vesting and transfer. Restricted stock typically provides strong long term incentives to recipients because they must remain with the company for the stock to vest and have the right to realize the anticipated gain in the value of the stock over time. Vesting can be tied to the passage of time, the attainment of specified performance metrics or some other measure. Moreover, recipients tend to feel more connected to the company if they own stock (even if it is restricted and subject to vesting).
Phantom Stock. Phantom stock is a form of compensation based upon the performance of a company’s stock over time. A recipient is given “Phantom Units” that are not shares of stock, but track with the value of the stock of the company. The company will typically define time periods and/or performance metrics that must be met for the Phantom Units to vest. Once the Phantom Units vest, a cash payment is made to the recipient based on the value of the actual stock at that time. Therefore, Phantom Units are a “parallel universe” to the stock, which track value over time and pay out cash at specified periods. These programs can be infinitely flexible and recipients receive the upside of being a shareholder without actually owning any stock. A note of caution for the company, though, as if the stock value increases significantly, these plans can require substantial cash payouts.
As you can see, the basic idea in each of these alternatives is that the business must be successful and grow for these compensation methods to provide value to the employee. Therefore, in addition to providing monetary gain and retention, they provide a nice incentive for the employees to do what it takes to increase the company’s value. Of course, care must be taken when evaluating these types of programs as they typically include complicated tax, accounting and legal considerations that must be addressed in each specific instance. However, in these troubled economic times where employees are being stripped of compensation at every turn, perhaps a small paradigm shift will give your business the edge it needs to excel.