Financial compensation could get you the best executive, and could also steal your most talented executive or employee. What makes an employee loyal, and what makes them stick?
Them believing in what you believe in, and knowing you’ll grow together, and that once you grow, their financial compensation should and will grow with you. Remember, your success is determined by the success of every employee in your company.
Finding and retaining talent is amongst the most challenging aspects of every startup. A necessary way to incentivize the caliber you need to scale and grow your startup while being unable to pay market salaries is giving away employee stock options.
Founders are usually generous towards investors and stingy towards employees when this should be completely reversed. Investors' role is to fund the startup, and typically don't follow up on any of the promises they made aside from the funding, whereas employees are the ones that stick and they are the ones that will determine the value of your company. As Gary Kelly, Southwest's CEO, said:
Our people-first approach, which has guided our company since it was founded, means when our company does well, our people do really, really well. Our people work incredibly hard and deserve to share in Southwest's success.
A stock option plan grants employees the right to buy company stock at a specified price during a specified period once the option has vested. If employees get an option on 100 shares at $10 and the stock price goes up to $20, employees can "exercise" the option and buy those 100 shares at $10 each, sell them on the market for $20 each, and pocket the difference. But if the stock price never rises above the option price, the employee will not exercise the option. Stock options can be given to as few employees as you wish. About nine million employees in thousands of companies, both public and private, presently hold stock options.
Here are four basic types of employee compensation plans, and they are:
An employee stock ownership plan (ESOP): A benefit plan that offers employees an incentive and stake in the company by a salary-sacrifice. Employees gradually vest in their accounts and receive their benefits when they leave the company, although there may be distributions prior to that.
Restricted stock: Gives employees the right to acquire shares by gift or purchase at a fair value of discounted value. However, they can only take possession of the shares once certain restrictions, usually a vesting requirement, are met.
Phantom stock: Pays future cash or share bonus equal to the value of a certain number of shares to selected employees (senior management). Companies give their employees the benefits of stock ownership without really giving them any company stock.
An Employee Stock Purchase plan (ESPP): Gives employees the chance to buy stock. The price is usually discounted up to 15% of the market price. Frequently, employees can choose to buy a stock at a discount from the lower price at the beginning or the end of the ESPP offering period, which can increase the discount still further. After acquiring the stock, the employee can sell it for a quick profit or hold onto it for a while. Millions of employees, almost always in public companies, are in ESPPs.
Before you choose a plan, you'll also have to consider which stock option plan will affect your employees' financial well-being and the company's overall growth.