The future of work as we know it is shifting radically in new directions. Remote setups, digitalization, flexible arrangements, and a focus on work-life balance— these are just some of the forces that are transforming work as we know it.

But it’s not just the way that we work that’s changing. We’re also seeing shifts in how people are compensated and incentivized for their work. In this article, we look at one major shift in work compensation: share-based models. Let’s dive in.

How Does Share-Based Compensation Work?

Share-based compensation is a system that rewards employees with company shares, including stock options, restricted stock units (RSUs), and employee stock purchase plans (ESPPs). This compensation model has become extremely popular, especially among larger companies. About 67% of companies with a market capitalization of $10 billion or more use a share-based compensation model in their organization.

Many organizations and leaders favor this model because it motivates employees to contribute to the company’s success. This often increases the company’s stock value and many other benefits to both employer and employee. However, it does come with it’s own set of problems, such as complex tax implications and equity dilution for existing shareholders.

Benefits of Share-Based Compensation

Share-based compensation is changing work as we know it because of its many positive effects on companies and their employees. Here are some benefits that are shifting the tides more and more every year.

Enhanced Employee Motivation and Retention

Employees who receive shares tend to feel more ownership in the company, which brings a higher sense of belonging and loyalty. This psychological ownership can also increase productivity and commitment to the company’s goals.

Many companies also use share-based compensation as a retention tool since these shares typically vest over time. That incentivizes employees to stay with the company longer to reap the full benefits.

Alignment of Employee and Shareholder Interests

Employees’ financial interests align with the company’s performance when they own stock. This alignment encourages them to enhance the company’s value, benefitting all shareholders. Shareholders typically focus on long-term value creation. Hence, share-based compensation helps cultivate a similar long-term perspective among employees, effectively shifting their focus towards more sustainable growth.

Attracting Top Talent

Offering shares can be a strong incentive in industries where competition for top talent is fierce. It’s especially attractive in startups or tech companies with high potential for growth. Shares appeal to ambitious professionals keen to contribute significantly to a company’s growth and share in its success.

Tax Advantages for Employers and Employees

In many cases, the taxation on gains from shares is lower than that on regular income. This makes share-based compensation financially attractive for employees. Employers also tend to favor share-based compensation because it’s more tax-efficient than other bonuses or salary increases.

Effective Cash Management for Companies

It’s common for startups and growing companies to face cash constraints. Share-based compensation allows these companies to attract and retain talent without immediate cash outlay. This system frees up cash for more critical business operations, research and development, or growth and expansion efforts.

Performance-Based Incentives

Companies with a share-based compensation model tie these incentives to specific performance metrics that encourage employees to meet and exceed their targets. Using this approach ensures that the highest-performing employees are recognized and rewarded, fostering a culture of excellence and achievement.

Wealth Creation Opportunities for Employees

Employees can build significant personal wealth by joining early-stage companies that grow in value. For many employees, this can contribute to their financial security and an investment portfolio that supplements their regular income.

Cultivating a Culture of Ownership and Responsibility

Owning a part of the company can increase engagement by giving employees “skin in the game.” Employees are more likely to think like owners and take more responsibility for their work and its impact on the company.

Should You Start Implementing Share-Based Compensation In Your Company?

The answer isn’t as straightforward. Deciding to implement share-based compensation in your company requires careful consideration. It’s not a one-size-fits-all solution and may offer significant benefits or pose challenges depending on your company’s unique circumstances.

When implementing a share-based compensation structure in your company, these are some of the factors you should consider:

  • Company Stage and Stability — Early-stage companies or startups with share-based compensation might benefit more from this model, as they can preserve cash. For stable, established companies, the impact might be less significant.
  • Company Performance and Industry — This compensation will only be effective if the company has high growth and performance. In high-growth industries, the potential upside for employees can be substantial. Otherwise, employees might not see the value of these compensation models.
  • Employee Preferences — You also need to study the demographics and preferences of your workforce. Some employees might prefer the stability of cash compensation. There’s also a high chance that your potential employees might not understand or value this model.
  • Legal and Tax Implications — Look closely into the company and employees’ legal and tax implications. Different countries and regions have varying regulations regarding equity compensation.
  • Impact on Company Culture — Reflect on how this compensation will affect your company culture. It can foster a sense of ownership and unity, but it might also introduce concerns about equity and fairness.

Get Clarity and Help

Deciding to implement a share-based compensation depends on a mix of factors. It’s advisable to consult with legal experts and people with finance degrees to understand the implications fully. When you design share-based compensation models well, you harness the benefits of this approach while mitigating its potential downsides.

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