How Much Stock to Award How much stock should each employee receive? The size of the equity awards - both to individual employees and to the workforce as a whole - is a difficult decision for companies implementing a stock program.
A decision on the size of the overall pool available for employees should begin with a review of the owner's motivation for sharing equity in the first place. Most often, this revolves around recruiting and retaining good employees and strengthening their commitment to the organization. A decision on equity awards centered on creating the most productive, high performing team rather than on arbitrary parameters will significantly enhance the effectiveness of an equity compensation program.
Decisions about the exact amount of equity to be awarded to each individual will be influenced, to a great degree, by the company's prevailing philosophy and beliefs about human resource management. Companies that subscribe to a performance-based award system may want to tailor awards of equity according to each individual's contributions to the growth of the company. Other companies believe that while performance-based awards are laudable in theory, in practice they may be flawed by a large element of subjectivity that may produce as many upset employees as inspired ones. Many companies will adopt some middle ground, awarding some stock by a standard formula, such as a percent of pay, with the remainder of the equity in the program reserved for special merit recognition.
It is important that the amount of ownership awarded is meaningful to the employee and provides enough incentive to produce the desired behavioral changes. Some companies will establish performance-based goals for equity awards. Others establish compensation goals for specific employees.
A company's approach to vesting will also be a factor in determining who ultimately ends up with the company's equity. A long vesting schedule that requires employees to remain with the company for a substantial period of time will, in the final analysis, result in more stock being owned by those who give longer service to the company. On the other hand, an excessively long vesting requirement can be viewed with skepticism by some employees, who may feel they will never really gain permanent ownership of the stock. For ERISA-based plans, the vesting schedule may not be longer than seven years.
When to Make Awards
When will employees receive equity? In the case of individual-based plans (stock grants and options), it is generally recommended that equity be awarded in smaller periodic (usually annual) grants rather than a single, large "new hire" grant. Then, if the company's stock price should drop after a grant of options has been made, the employee can at least look forward to another grant the following year at a lower exercise price.
This approach also allows for the granting of equity based on individual or group performance. Multiple awards, rather than one-time grants, have the added benefit of layering the vesting schedule, thereby reinforcing equity compensation as a strategy to help retain employees.
With ERISA-based plans such as ESOPs and 401(k) plans, employees are generally able to participate in the plan within one year of hire. By requiring employees to work one full year to attain eligibility to participate, short-term employees will not acquire ownership rights.
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