What Are Equity Grants & How Do They Work?

Equity grants allow a company to share in the profits of that company with its employees. For HR departments in the United States, a comprehensive understanding of equity grants can inform the creation of competitive compensation packages for employees.

1.0 What are equity grants?

Equity grants, also referred to as equity compensation, allow employees to own a portion of the company they work for. Rather than offering just a standard cash salary, companies combine traditional paychecks with company stock, allowing the total compensation package to grow in value over time.

Research from NCEO found that the turnover rates of companies that offered equity compensation to their employees was significantly lower than those companies that did not offer equity compensation to their employees.

These findings indicate that companies that effectively manage equity compensation for their employees will experience significant benefits in relation to the cost of employing those individuals.

1.1 What is equity compensation?

Equity compensation is a form of pay that employees receive that does not use cash. Equity compensation is offered in addition to an employee's salary and bonuses. HR teams use it to offer employees a competitive salary while also providing them with an incentive to perform well within the company. Employees value equity compensation due to its potential financial benefit within a growing company.

1.2 Why do companies offer equity grants?

Companies offer equity compensation to attract employees with the necessary skills for the position they are applying for. Additionally, equity compensation can improve employee motivation and retention within a company's payroll.

A recent survey by Morgan Stanley found that companies with employee equity compensation saw an increase in employee retention and engagement with their company.

Building competitive compensation packages requires understanding how other employers structure pay and equity programs. Many organizations use CompAnalyst® Market Data to benchmark compensation against current market trends and ensure their total rewards packages remain attractive to top talent.

2.0 How do equity grants work?

Equity grants have a specific work timeline and terms attached to them. Employees will not receive cash from their company through an equity compensation. The value of an employee's equity compensation will work according to the terms established by the company when they awarded the grant to an employee.

HR departments must understand equity compensation to be able to effectively communicate the terms of these grants to employees when hiring and while they are employed in the company.

Equity grants include the following components:

• The date that a company grants equity to an employee

• The schedule for when an employee will earn their awarded shares

• The length of time an employee must be employed before any vesting of shares occurs

• The price that an employee will pay for each share of stock that is awarded to them through stock options

• The date by which an employee must exercise their stock options or they will be permanently forfeited from the company's stock

The most common equity compensation or grant schedule features a cliff period of one year and a vesting period of four years. This is the standard equity compensation schedule that most employers use within the United States.

3.0 What are the different types of equity grants?

There are several different types of equity grants that an employer may award to their employees. An understanding of these different types of equity compensation can allow HR teams to make informed decisions when offering equity compensation to different categories of employees.

Type	How It Works	Who It Covers
Restricted Stock Units (RSUs)	Shares issued at no cost to the employee, taxed as ordinary income when vested	Primarily publicly traded companies
Stock Options	The right to buy shares at a preset price; profitable when market price rises above the strike price	Public and private companies
Incentive Stock Options (ISOs)	Options that may qualify for a reduced capital gains tax rate if specific IRS conditions are met	Employees only
Nonqualified Stock Options (NSOs)	Options taxed as ordinary income when exercised, with broader eligibility than ISOs	Employees, contractors, and directors

The IRS makes a distinction between incentive stock options and nonqualified stock options by specifying the eligibility of each type of share and on what date the employee will owe taxes on their shares. Employees that are awarded incentive stock options will earn a lower tax rate on their shares, but only if they follow the specific regulations of the IRS regarding the holding of those shares.

Managing multiple forms of equity compensation can become increasingly complex as organizations grow. CompXL® helps HR teams administer equity awards alongside merit increases, bonuses, commissions, and other reward programs.

4.0 How should HR teams manage equity grants?

The management of equity grants for employees by HR teams can have a significant impact on a company's retention of those employees. Additionally, when equity compensation are managed efficiently by an HR team, it can have a notable impact on reducing talent acquisition and recruiting costs by keeping current employees satisfied.

A recent report found that companies that offered equity compensation to their employees experienced a notable decrease in the number of employees that voluntarily left those organizations. Many of these departing employees cited their reason for their departure as the unvested equity that they had within the company.

A few strategies for managing equity compensation that many companies use include:

• Hiring equity compensation management software so that they can track each employee's equity compensation and departures from the organization.

• Providing equity education for employees either at the time of hiring or each year.

• Working with legal teams to ensure that equity compensation to employees meet all SEC and IRS regulations.

• Creating an equity policy for the company that defines the equity compensation that the company will offer to its employees.

• Reviewing the equity compensation policies each year to ensure they are in line with other companies in the same position and industry.

Effective communication is essential for helping employees understand the value of their equity awards. Elevate® provides employees and managers with personalized insights into compensation, benefits, and career opportunities through a secure portal.

5.0 FAQs

Here are the common questions about the topic:

5.1 Are equity grants considered part of an employee's total compensation package?

Yes. Equity awards are a recognized component of total compensation. HR and compensation professionals include the fair market value of grants when calculating what an employee earns in full. This is especially relevant during offer negotiations, where the total value of equity can represent a significant portion of the overall package.

5.2 Do you pay taxes on equity grants?

Yes, though the timing depends on the grant type. RSUs are taxed as ordinary income at vesting. Stock options are taxed when exercised. ISOs may qualify for a reduced tax rate on gains if the employee meets the IRS holding period requirements.

5.3 Can you cash out an equity grant?

Employees at publicly traded companies can sell their vested shares on the open market at any time outside of restricted trading windows. At private companies, employees typically must wait for a liquidity event such as an IPO or acquisition before converting equity into cash.

5.4 What happens to equity grants when an employee leaves the company?

Unvested equity is forfeited upon departure. Vested stock options typically include an exercise window of 90 days after the employee's last day, after which they expire and are no longer available. Departing employees should review their grant agreement details before their final day to avoid losing any vested value.

5.5 How much are equity grants typically worth for employees?

The value varies widely by company stage, role level, and industry. Compensation data showed that standard startup equity offer sizes dropped by roughly 26% following recent market corrections, illustrating how quickly standard market benchmarks shift and why HR teams must use real-time data at the offer stage.