And because people matter, paying people matters.
How you compensate folks comes from how you motivate them, and when motivated, your good people will:
1. Buy-in to your vision
2. Stay with you
We are in a time when multiple generations are in the workforce – Boomers, Gen X, Millennials – and each is motivated in different ways. So in a day and age of competing priorities, different values for different generations, and an economy that is demanding and punishing, what are employers of choice doing creatively?
Cash – This is always appreciated, no matter who the employee is or what the circumstances. When attached to the right desired behavior, cash is a powerful motivating tool. However, when viewed as a discretionary afterthought at the end of a busy year, employees tend to view it as deferred compensation. Rather than give them a raise (or a bigger raise), you only waited to give them that raise in the form of a lump sum. That perception may not be fair, but as they say, “perception is reality.”
Equity – Giving your best performers a stake in the upside of your company is a great way to get their buy-in. Yet the challenge is always to make the stick long enough to keep folks moving toward the carrot, but not too long that they abandon the carrot chase. Is the carrot motivating enough? Some ways that companies use equity as compensation and motivation are:
Stock options – Options give the employee a right to purchase shares at a pre-determined price. Most plans grant options at or above market, so that there is no immediate compensation impact on the employee. If that were to happen, the effect would be de-motivating since the employee would have “paper income” and have to fund their tax bill out of pocket. When done properly, the employee is motivated to drive the company value higher and participate in the upside.
Stock appreciation rights – Similar to options, these instruments provide incentive compensation based on the appreciation in the company’s stock value and are payable when vested or exercised. The amount the employee receives is generally the difference between the share value at grant date and the exercise date, usually paid in cash. In this way, the employee drives company value but the owners are not giving up equity, instead paying cash for the value the employee provided.
Phantom stock – In this structure, employees are granted a hypothetical interest in the company. Those phantom shares can increase in value based on fair value, revenue, EBITDA, or any other metric, and the increases are usually paid in cash. The payment date can be pre-determined as annual, every X years, or upon sale or IPO of the company.
Restricted stock – In this type of plan, the employee receives an actual share of the company but transfers and sales are restricted during the pre-determined period. The employee is still motivated to increase the share value, but they must hold the shares and try to improve the long term value of the company.
Yet one of the biggest challenges facing private companies is providing equity incentives without an active market. Unless an IPO is in the near future, the value of the company is difficult to discern. So, what’s a private company to do?
No matter what generation an employee comes from – Boomer, Gen X, Millennials – everyone wants to be a part of something bigger than themselves. Creating the right culture is just as important, if not more so, than building a compensation package. Good professionals will join and build a positive, affirming culture as long as the dollars are reasonable.
Throwing compensation dollars at a culture problem just delays the inevitable exodus of good talent. That’s why your compensation plan has to support your culture, not the other way around. What does good culture look like? It is:
– Long-term focused
That’s why employers of choice are providing creative incentives, such as additional paid time off, educational stipends, and company trips. Even the occasional happy hour signals to your professionals that you want them to have a little fun.
Let’s not forget fun. We spend far too much time at work to not enjoy it, and building a little fun into the workplace goes a long way toward building a culture that lasts. When competitive compensation is coupled with superior culture, the results will astound you.