This is an excerpt from Dollar Scholar, the Money newsletter where news editor Julia Glum teaches you the modern money lessons you NEED to know. Don't miss the next issue! Sign up at money.com/subscribe and join our community of 160,000+ Scholars.
I recently took a vacation to attend my brother’s wedding in North Carolina. It was the longest trip I’ve taken the entire time I’ve worked at Money. The bulk of my paid time off gets reserved for traveling back and forth to Florida for the holidays, and I’m always always afraid to use the rest of my PTO in case something comes up and I need it.
(Yes, I did take a day off last year for a Jonas Brothers concert. That’s exactly what I’m talking about.)
I’m not the only one who has PTO on the brain. The Great Resignation has put a renewed focus on benefits as companies scramble to fill job openings. At some workplaces, this has taken the form of unusual work perks like private chefs and “pawternity” leave. At others, companies are raising salaries or offering their employees non-cash compensation like equity.
How does equity compensation work?
Jane Alexander, the chief marketing officer for equity management platform Carta, says equity compensation is basically “an ownership stake that allows [workers] to be financially tied to the outcomes of that company.”
Employers like the concept because it gives employees skin in the game. Linking a person’s work to the company’s success can incentivize them to work harder and stick around longer.
“You often will hear companies say things like, ‘I want people to act like an owner.’ Well, the best way to get someone to act like an owner is to make them one,” Alexander says.
There are some pretty compelling stats to back up this logic. A recent Morgan Stanley at Work report found that 93% of HR professionals and 75% of workers said equity compensation and stock ownership are “the most effective way to motivate employees.” In addition to the idea that their labor can literally pay off, workers said they liked that it provided another (potential) source of income.
Alexander says there are different types of equity. Which type a company offers often depends on both the developmental stage of the company and the title/status of the employee in question.
The four main forms include:
- incentive stock options, or ISOs, which let me buy shares of my company’s stock at a specific price — and maybe get a tax break on it
- non-qualified stock options, or NSOs, which are similar to ISOs but without the tax break
- restricted stock awards, or RSAs, which grant me shares of my company’s stock — and voting rights — right away
- restricted stock units, or RSUs, which are similar to RSAs but only become available to me after a vesting period
There is one big benefit to RSUs: I usually don't have to buy them. RSUs will also almost always retain some value. Once they have fully vested, for instance, I can sell them and get cash (though I obviously have to pay taxes).
Kate Winget, head of corporate and participant engagement for Morgan Stanley at Work, says vesting periods have been getting shorter lately. She’s seen other trends in the space, as well, like the fact that more lower-level workers are receiving equity as opposed to it being reserved solely for the C-suite.
And the tight labor market means that equity isn't something just offered by startups anymore. Winget recommends making it part of my next job search, regardless of industry. Alexander suggests also looking at whether a company is private or public and, if the former, investigating how long it might take me to be able to cash in.
Equity isn’t right for everyone, but it can’t hurt to consider whether it could help me financially.
“Ask those recruiters or companies, ‘What is your equity compensation package?’ or ‘What kind of equity compensation would I be eligible for?’” Winget says.
The bottom line
Equity compensation is a way for employers to attract workers and give them a stake in a company’s success. But it can be complex, so I need to be careful to know the details and vesting timelines associated with each type of equity. Case in point: Alexander says some $580 million in equity expired without being exercised last year, meaning it went back to the company instead of into workers’ pockets.
In today's tight labor market, though, equity is a compensation trend that’s growing in popularity. Even Beyoncé knows its value.
“It is an innovative way that employers are engaging with employees, showing them the investment they're making in them,” Winget says. “From the employees’ perspective, they can recognize, ‘Ah, my time here is going to be rewarded.’”