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What is an Equity Incentive Plan?
In today's dynamic business landscape, remote work has become the norm in many parts of the world.
It gives companies the power to source the best of the best—independent of location. As organizations increasingly rely on talented remote workers, they face unique challenges in attracting and retaining top talent.
One powerful tool for achieving this is offering equity, or financial, incentives to remote workers. They can be among the best employee benefits you can offer in 2023.
This guide will outline the ins and outs of offering a company's equity compensation to remote workers, from the basics to advanced strategies. Especially with so many workers in today's landscape carrying student loan payments, having savings goals and finding new ways to establish themselves in the modern world.
If you’re looking for tips on how to engage remote workers with equity plans, keep reading.
Understanding Equity Incentives
What Are Equity Incentives?
A company equity incentive plan is a structure in which employees are given shares of a company that they work for. Employees and remote workers alike can buy into plans, or in some cases, be given as part of a hiring package.
Incentive stock options can be part of a bigger way to incentivize workers to come on board with your company, especially in major fields like technology.
Sometimes there are even cities offering incentives for remote workers, like Savannah, Georgia and Lewisburg, West Virginia in the US, so it’s especially important to be well-versed in understanding equity in this remote work landscape.
Why Offer Equity Incentives to Remote Workers?
Equity incentive plans can be one of the most enticing ways to get great players on your team to stick around. Having a monetary share in your company helps individual employees really get the sense that they are a part of your company.
Part-ownership can make your team experience more positive feelings associated with working for you. It can also incentivize them to recruit other great staff members who may be interested in owning shares and spreading positive sentiment about the company through word-of-mouth.
Equity plans help attract and retain the type of quality employees that will help drive your company to greater success and growth.
By offering financial incentives, companies align the interests of employees and remote workers with those of shareholders, fostering loyalty, motivation, and long-term commitment.
With the right equity incentive programs, you can better support your team and help to curate a company culture that is built around empathy.
An incentive program offers employees a new way to pay down debt with support on their student loan payments, help save for a down payment for a home, be well-equipped in emergent situations, and so much more.
What Kind of Equity Options Are Available for Remote Employees?
As an employer, you can investigate a few types of equity incentives for your team, whether remote, in a co-working space or in-office.
Some of these include:
Stock Options
Stock options grant employees the right to purchase company shares at a predetermined price (the exercise price) at a future date. This option can effectively motivate remote workers as they gain value if the company's stock price increases.
Restricted Stock Units (RSUs)
RSUs grant employees actual shares of stock after a vesting period. RSUs offer the advantage of immediate ownership and can be an excellent tool for retaining remote talent.
Stock Appreciation Rights (SARs)
SARs provide remote employees with the financial benefit of stock price appreciation without actual share ownership. They can be particularly attractive to employees concerned about stock ownership complexities. Unlike regular stock options, SARs do not require employees to pay an exercise price but instead can receive the payout from an appreciated stock in more stock or cash. The aggregate fair market value (fair market value amount multiplied by several warrant shares that are being given up to a company at a given time) can be determined by looking at the exercising of a SAR before a designated exercise window.
Phantom Stock
Phantom stock mimics actual stock ownership but does not grant ownership rights. Remote workers receive cash payments equivalent to the company's stock value, allowing them to participate in the company's growth without stock ownership.
How Can I Allocate Company Equity?
Okay, so who gets to buy into company stock options? Should equity options be available to all company workers at every level? If you’re looking at offering equity, you may be considering factors like full-time vs. part-time status, worker seniority and employee vs. contractor roles.
There are a few governing factors that generally go into determining who gets stock options.
These include:
Vesting Schedules
Vesting schedules determine when remote workers gain ownership of their equity. Customized vesting schedules can align incentives with long-term commitments.
Equity Grants/Equity Purchase Plans
You can decide whether to gift equity to those with full-time remote employment or offer it for purchase. Each approach has its benefits and implications for the company and employees. Some plans can include both, but it will depend on the scope of your project.
What Legal and Tax Considerations Do You Need?
Before you begin offering equity allocations, ensure you comply with local legal and tax requirements.
Compliance with Laws and Regulations
Equity incentives must comply with local and international laws, including securities regulations and tax laws. Consult legal experts to ensure compliance.
Tax Implications for Remote Employees
A remote worker may face unique tax considerations, especially in cross-border employment situations. Understanding and addressing these issues is vital to prevent tax-related problems.
International Considerations
Expanding your remote workforce globally requires a deep understanding of the legal and tax implications of offering equity incentives to those working remotely in different countries.
Think about where you are based and where you are hiring from.
What tax structures or regulatory bodies exist there that might impact your equity incentives?
It’s a good idea to familiarize yourself with any of these that may apply to your company. An Employer of Record (EOR) can help you with this process when dealing with a distributed team.
Communicating Equity Offers
After you effectively understand what equity options are and how they work, you can begin to go about building realistic equity offers for your distributed team.
This includes creating equity agreements— getting both your part-time and full-time remote employees to commit to a plan for how they can acquire and grow their equity with your company.
In building equity offers, you want to think about equity as a full life-cycle— is it something new hires can acquire, or does a remote employee need to “do their time,” so to speak, to start to build?
Equity can be a way to reward a loyal remote worker, so think about whether you want to offer this option as a reward for longevity or build it into your hiring package to get a leg up in your market.
Great equity offers can serve as key incentives for remote workers, especially those with full-time remote employment.
Performance Metrics and Equity
Equity options are usually based on employee performance and hitting targets.
Not only can it be a reward for long-term company commitment but for hitting business targets and KPIs.
Take a look at how you’re setting performance. Do these goals allow for your workers to be able to build equity with your company?
Consider setting performance goals: align equity incentives with performance metrics that are relevant and measurable for remote employees. You can even consider extended performance-based equity awards if you already provide your employees with company equity.
This can be a way to reward exceptional remote workers who go above and beyond.
Evaluating Remote Employees' Performance
If you are considering performance-based equity, how can you evaluate the performance of your remote team in a way that allows you to develop a measurable equity awards system?
It’s a good idea to develop guidelines for evaluating your remote worker's performances to make sure equity incentives remain aligned with company goals.
You likely already work with monthly or weekly KPIs or other targets that help drive productivity and give remote workers the sense of whether their performance meets company standards.
It can even help them know whether they are ready to move up a job level, for example, from an entry-level to an intermediate role.
Although many managers or employers work with these metrics, they often go overlooked in the consideration of equity incentives, so it’s a good idea to build this quantifiable data into developing or altering a plan for employee equity.
Managing Equity Over Time
Long-Standing Employees
For longstanding remote workers, do you have a solution in mind as to how their company equity can grow?
If you’re investing in equity for long-standing employees, it’s important to show that their contributions make a difference to your company. Consider offering equity refresh grants.
These are yearly or periodic top-ups to an employee’s equity allowance as they continue to grow with your company. Thinking about equity from a holistic perspective, you’ll also want to think about employee departures.
Post-Termination
What happens to employee equity when a worker leaves your company? For equity purposes, employment contracts should have a Post-Termination Exercise Period (PTEP) clause that oversees the exercise or sale of stock options. Employees usually get an “exercise window” after termination from a company.
Often this is a 90-day time allotment where they are allowed to exercise their remaining company stock options. As a responsible employer, it’s a good idea to make sure terminated employees exercise their options within the window period to benefit the most.
If remote workers do not exercise their options, generally, they go back to an “equity pool” where they can be granted to other new or existing workers in their own equity plans.
Increasingly, startups and newer companies are beginning to expand the exercise windows for their options.
The Importance of Conducting Research
Make sure to conduct market research within your industry to determine what is a reasonable amount of time to allow your employees to exercise their options. By giving a more flexible policy in this domain, you can set yourself apart as a people-focused employer that shows they value employee wellbeing and financial safety.
Establishing Policies and Procedures
Establishing policies and procedures for handling equity is important when remote employees are no longer part of your workforce. You may also consider implementing equity buyback programs.
These provide liquidity for remote workers and reduce dilution for existing shareholders.
Case Studies
To get a better gauge of successful equity incentive processes, especially one that can lure remote workers to your full-time remote job, look at case studies of previous similarly-sized companies that have offered these to their staff.
Successful equity incentives for remote employees likely have some commonalities, so be mindful of any trends or strategies of interest that you see cropping up in case studies. Why not try and implement a similar procedure within your workplace?
You can also look at lessons learned from equity challenges. Did a company fail spectacularly or even partially at bringing equity incentives to their business? Why might that have been?
A company that largely experienced failure in this regard can serve as a what-not-to-do for your process. Even a company that experiences success but with some hurdles can be a good learning example for you.
That way, you can aim to emulate the successes and steer clear of the elements that failed.
Advanced Strategies for Equity Incentives
If you’re already well-versed in offering equity incentives, there’s always room to up the ante and expand on these models to set yourself apart as an employer.
Equity pools, for example, can be used if you want to set aside stock options, particularly on restricted stock. Usually, about 5-25% of a company’s total equity will be allocated to a pool.
If you are using an equity pool, the size of the pool should be large enough to account for offering options and grants for recruitment and new hires. That being said, you need to make sure that the pool does not dilute equity ownership interests from your investors.
Make sure you learn about creating equity pools specifically for remote teams to ensure their unique contributions are rewarded and that you’re able to find a happy balance between satisfying your employee's and external stakeholder interests.
Hybrid Compensation Models
Consider hybrid compensation models that combine traditional salaries with equity incentives for remote workers.
These would allow you to pay your employees in part through equity and take some of the heat out of direct salary compensation. This being said, equity is subject to the whims of the market and your industry.
Performing additional market research is essential in making sure your strategy here is airtight if you want to create an equity plan that includes hybrid compensation models.
Customized Equity Plans
Are you wondering how to engage employees with compensation? Consider a customized equity plan.
Tailor equity plans to the specific needs of your company and your remote workers. Think about how your plan can best impact your workers. You should factor in the size of your company and the number of employees in this consideration to devise an appropriate plan here.
How to Engage Remote Employees With An Alternative Incentive Program
On top of offering equity to your remote team, there are some ways to make your workers feel more involved in the company through alternate incentives.
Co-Working Space
Could you offer a co-working space or relocation assistance under a remote worker program for team members who need it? Potential applicants will analyze your company holistically when they’re thinking about applying, so it’s important to look at what you offer from a lifestyle fit perspective.
Moving Expenses and Relocation Assistance
Put yourself in your workers’ shoes. Maybe they’re dealing with factors like relocation costs moving expenses related to their remote roles, or even student loan debt for entry-level workers.
Think about the things you may want if you had to take on their roles! While some things may be out of reach, like offering your employees perks like free Internet, there are some things that you can do to make employment with your organization all the more intriguing.
How Borderless AI Helps?
Borderless AI enables businesses to compliantly hire and manage talent worldwide without establishing a foreign entity. We alleviate the complexities and risks associated with hiring global employees with zero deposits, dedicated in-house support, and AI-powered global employment law resources.
Speak with our team today to find out more about equity incentives for your global team.
Disclaimer
Borderless does not provide legal services or legal advice to customers, contractors, employees, partners, or the general public. We are not lawyers or paralegals. Please read our full disclaimer here.
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