Employee retention can be enhanced through equity participation. There are many ways to provide this additional compensation, often through some form of deferred compensation. Employee ownership of shares is just one possible arrangement. Other options include sharing in the appreciation of the company’s value over time without actually owning stock.
The issuance of stock options is a popular way for employees to reward and motivate key employees. See the separate section on “stock options” for more details. While employee stock ownership can be very effective as an employee retention and motivational tool, there can also be restrictions and complexities to compensating employees with equity. These are particularly true for privately help companies.
Phantom stock/stock appreciation rights
There are a number of ways to reward employees without involving them as partial owners of the company. Phantom stock and a stock appreciation rights program are ways to provide an owner-like benefit to employees without having them actually own stock.
These plans pay employees the equivalent of an increase in the company’s stock value without actual ownership attached. The award is based on the difference between the stock’s value on a specified date and its current value. This can be advantageous: Employees are rewarded for company success without incurring tax obligations or being concerned about legalities associated with ownership.
Varied approaches to stock ownership
There are many more ways that ownership of company stock can be spread among a much broader base of employees, not just among an elite group of “key employees.” These include:
- Stock awards. These grant immediate ownership of stock.
- Restricted stock units. Call for stock to be issued in the future, as long as conditions such as continued employment are fulfilled.
- Stock purchase plans. They allow a broad group of employees to purchase stock.
- Employee Stock Ownership Plans. Stock ownership is shared broadly among company employees.