Talking About Equity: 4 Conversations You Should Have

Equity is a significant term that employees often hear nowadays. Some companies say they want to create a fair culture, but what does that really mean? It is easy to claim it, but making real changes requires honest conversations. Discussing equity compensation can be a complex topic for some. This is why companies must prioritize initiating and engaging in more conversations with their employees about equity. For companies wanting change, this article covers four key conversations they should have with their team.

The Compensation Equity Conversation: Why It Matters

To build trust, companies need to have transparent discussions about compensation with their employees. This involves explaining how pay and promotions depend on experience, skills, and performance.

Equity compensation means companies give employees ownership of the company instead of simply giving cash or bonuses. They may get shares or options to buy stock, which means they own a portion of the company's value. It may be as simple as it sounds but understanding how it works can be challenging.

Many employees may not fully understand how equity pay works or what good benefits it offers. That said, it is important for managers to engage in conversation with them so they can understand the worth of their equity. The conversation must also include how equity unlocks over time and the tax that comes with it.

Discussing equity compensation can also boost employee motivation. They see how their efforts impact the company's success and how their equity can grow with it. This understanding makes them more committed and driven to contribute more. When workers understand their equity and how it aligns with their pay, they feel valued and get more into their job.

Conversations about pay, promotions, and perks make employers and workers trust each other more. It can be tough, but being clear and honest about these things makes work better. It means everyone feels appreciated and treated right in a fairer and happier workplace.

#1: Market Comparison Conversation

Employees must be informed of how the company comes up with the equity offer.  Most companies use market comparisons to offer equity compensation. Discussing the market dynamics that affect the equity offer can avoid confusion and promote trust.

• Comparing Salaries to Industry Standards

Having transparent conversations about employee compensation in relation to industry standards is key. Employees want to know if they're getting fair pay for their work. Comparing salaries against market rates helps companies pay fairly and makes workers feel good.

• Explaining the Company's Compensation Philosophy

Some companies pay higher than the market, while others aim for the market rate. There are also factors like location, experience, education, and performance to consider. Explaining the company's philosophy behind pay rates helps employees understand their compensation. For example, a company focused on internal growth may promote from within and pay on the higher end of the scale. A company hiring more experienced staff may aim closer to the market rate.

While salary is essential, compensation comes in many forms. The more a company can have open discussions on all aspects of compensation, the better.

#2: Growth Scenarios Conversation

Growth scenarios are critical conversations to have with employees about their equity packages. As a company gets bigger, an employee's share in the company becomes more valuable. However, the path of growth isn't always straight. Companies need to discuss how their share may change with different growth situations.

• Rapid Growth

When a company grows fast, an employee's share also quickly becomes valuable. But it is important to note that quick growth usually brings big changes. Roles and duties may change a lot. Companies should discuss how the employee's share will grow with the company's value. They also need to explain possible changes in roles. Employees must understand that fast growth often means changes in structure, and their jobs may differ as the company gets bigger.

• Slow Growth

On the other hand, if a company's growth slows or stagnates, an employee's equity may not gain much value over time. The company needs to talk openly about things that may block growth and how that affects shares. Employees should know the risks, and the company must offer other rewards to keep them motivated when things slow down.

• Mergers & Acquisitions

If a company is acquired, an employee's equity could go through major changes. Their equity package may be bought out, or they may receive equity in the new, combined company. The company must discuss possible acquisition scenarios and how each will impact employees' equity. Employees should go into the acquisition with realistic expectations about their equity's future.

Open conversation about different growth situations builds trust between the company and employees. Discussing how equity may change in different growth situations helps employees set their expectations. This also helps them feel connected to the company's success.

#3: Risk Rewards Conversation

Potential risks and rewards are also important matters that need an honest conversation. Employees should know that while options or stocks may go up in value, they can   also go down or be worth nothing.

• Assessing the Risks

Companies must inform employees about the risks of equity so they can choose wisely. The risks include prices fluctuating and not being able to sell shares immediately. Dilution is also a risk. The possibility of the company issuing more shares can reduce the value of its equity. Employees should understand these risks before accepting equity as part of their compensation.

• Balancing Risk and Reward

While the risks are real, the potential rewards of equity are appealing. If the company is successful over the long run, equity compensation can be very valuable. Companies should frame equity as a long-term incentive and an opportunity to share in future success. Equity gives employees a stake in the company and aligns their interests with shareholders. For some, the possibility of a large payout down the road may outweigh the risks.

The key is for companies to be transparent in educating employees on equity compensation. Explaining both the risks and rewards in an honest, easy-to-understand manner. Companies must give real examples to show how these risks can affect equity value in the long run. This helps employees decide based on their risk tolerance and financial situation.

#4: Knowledge Gaps Conversation

Like risks, knowledge gaps are also inevitable with equity compensation. Equity compensation is a complex topic. Many employees do not fully understand the details of their equity or how it works. But the company can take steps to avoid these gaps.

• Identifying Gaps

The company must survey employees to determine what they do and do not comprehend about their equity. For example, employees may not grasp vesting schedules, equity taxation, or what happens to equity if they leave the company.

• Providing Education

After identifying knowledge gaps, the company must offer education to fill them. This can include information sessions, written materials, or online resources. The key is to present information in simple, easy-to-understand terms.

Using concrete examples and analogies can help make complicated concepts clearer to employees. The company must also make resources and experts available to answer any follow-up questions employees may have.

• Continuous Learning

Educating employees about equity compensation is an ongoing process. Laws and policies change, and people's understanding evolves. Companies need to regularly check in with employees to see if they have any new questions or concerns about their equity. Refresher information sessions and updated written materials can help.

Equity is important in employee pay, so companies need to ensure employees understand it. Education and ongoing learning help fill knowledge gaps and make employees value their equity.

Conclusion

The path toward equity can seem intimidating, but the most important step is to start walking it. Having open and honest conversations is how companies and employees move forward. It won't be easy and there will be bumps along the way, but the destination is worth it.

The four conversations outlined here are a roadmap to get there. The rewards for companies and employees will be great. But it starts with engaging in conversations. So, let's keep this dialog going and work together to build a future that's equitable for all. If you need more help with your compensation, visit Salary.com. Check out our various products and services for your compensation needs.