How can you communicate equity and options to employees?

For many employees, the concept of equity, options and "phantom stock" are completely alien and unexperienced. Whether offered as an employee-funded investment scheme or a long-term incentive, it's vital to communicate as clearly and simply as possible, with your brand's tone of voice guiding your style.

Most employees do not understand the LTI instruments especially when they are linked to equity. Whether it ESOP, RSU, SAR, performance based vesting, discounted or FMV based strike price, opportunity for liquidation, exercise period or taxation - its very vaguely understood by the employees. As an employer, equity is a very expensive instrument and if poorly communicated its as good as vesting a scarce commodity. Organizations should have clearly defined equity plans that can and help them understand different types of scenarios and also use examples which are practical in nature and gives them a clear sense of what is available to them as a equity link compensation.

Most employees have heard the terms but dont understand how these vechiles work. You have to communicate in the simplest way possible, showing multiple examples of how equity and options work. Show a 4-5 year calculation where you show how equity options work. Show a full salary, bonus and equity total package comparisons. Share examples of grant vs vesting schedule, show impact of share price. One of the biggest opportunity here is for employees to understand how it works. Share basics of taxation impact if possible.

Equity instruments are generally used for critical talent or leadership teams. The intent of using this instrument is to create long term alignment and hence it is important that the benefits are clearly understood and it creates a sense of ownership. This means that they should have some pride in owning a piece of the company and that can only be done if the company shares its intent, policy design, hold is linked to the company's growth and why the company values the employee's contributions which will result in a significant upside to them as a reward.

Ensure that communication is inclusive and reaches all employees, regardless of their level within the organization. By combining clear communication with educational efforts, you can help employees better understand the value of equity and options, fostering a sense of ownership and alignment with the company's success.

All equity instruments come with a significant risk. The risks can include various different scenarios like the options going underwater, changes in the regulatory regime on taxation, companies valuation going down, unavailability of an opportunity to provide secondary exit, laundry list of the company to do an IPO exit, adverse market conditions impacting the ability to raise capital and provide an exit to the employees. Further the impact of dilution in case of new investors coming on board is one aspect which is very rarely understood by most equity instrument holders. Companies should try to make the process as transparent as possible by using equity platforms that can provide clear access to all the information

Equity instruments are generally created at a senior management level with the intervention of the board. It is important for every company to regularly assess whether they are employees have understood the plans clearly and if not by formal survey but informal focused discussions, one-on-ones and discussions with the key stakeholders try to gather feedback that should help the top management refine their plans as well as create a effective communication tool to make the most out of the equity their parting with.

Equity plants depend upon the scenario in which they operate and most importantly are a factor of the company's growth curve. It is also significantly dependant on whether the external market conditions have changed significantly from when the plants were created, is they got growth trajectory of the company on the similar lines of that was expected, has there any change in the regulatory aspects, and if the equity plans of the objective they were designed for. Usually all plants need to get reviewed from time to time and if required the possible tweaks that retain the effectiveness of these plants should be introduced during the course of these reviews.

In my experience on Wall Street managing investment portfolios for high net worth tech executives, the common questions were about how to manage their stock options (NSOs, ISOs), rule 144 stock, RSUs and large equity positions with an over weighting in the tech sector. It is helpful for employers to provide resources on the basic concepts but each individual’s situation is different. It’s highly advisable to encourage employees to speak to their tax advisor and their financial planner on the best investment strategy to minimize taxes and maximize wealth accumulation.