What Is Equity Compensation?

Equity compensation is non-cash pay that is offered to employees. Equity compensation may include options, restricted stock, and performance shares; all of these investment vehicles represent ownership in the firm for a company's employees.

Equity compensation allows the employees of the 🙈firm to share in the profits via appreciation and can encourage retention, particularly if there are vesting requirements. At times, equity compensatio🐠n may accompany a below-market salary.

Understanding Equity Compensation

Equity compensation is a benefit provided by many public companies and some private companies, especially startup companies. Recently launched firms may lack the cash or want to invest cash flow into growth initiatives, making equity compensation an option to attractౠ high-quality employees. Traditionally, technology companies in both the start-up phase aꦰnd more mature companies have used equity compensation to reward employees.

With equity compensation, there is never a guarantee that your equity stake will actually pay off. As opposed to equity (or in combination with equity compensation), being 澳洲幸运5官方开奖结果体彩网:paid a salary can be beneficial if you know e﷽xactly what you're getting. There are many variables that can impact your equity compens𝓰ation.

Types of Equity Compensation

Stock Options

Companies that offer equity compensation can give employees 澳洲幸运5官方开奖结果体彩网:stock options that offer the right to purchase shares of the companies' stocks at a predetermined price, also referred to as 澳洲幸运5官方开奖结果体彩网:exercise price. This right may vest with time, allowing employees to gain control of this option after working for the company for a certain period of time. When the option vests, they gain the right to sell or transfer the option. This method encourages employees to stick with the company for the long🧸 term. However, the option typically has an expiration.

Employees who have this option are not considered stockholders and do not share the same rights as 澳洲幸运5官方开奖结果体彩网:shareholders. There are different tax consequences to options that are vested versus those that are not, so employees must look into what tax rules apply to their specific situations.

Non-ꦅQualified Stock Options (NSOs) and Incentive Stock Options (ISO༒s)

Additional types of equity compensation include 澳洲幸运5官方开奖结果体彩网:non-qualified stock options (NSO) and 澳洲幸运5官方开奖结果体彩网:incentive stock options (ISOs). ISOs are only available to employees (and not non-employee directors or consultants). These options 澳洲幸运5官方开奖结果体彩网:provide special tax advantages. For example, with non-qualified stock options, employers do not have to report when they receive this option or when it becomes exer🐽cisable.

Restricted Stock

澳洲幸运5官方开奖结果体彩网:Restricted stock requires the completion of a vesting period. Vesting may be done all at once after a certain period of time. Alternatively, vesting may be done equally over a set period of years, or any other combination that the management of a company finds suitable. 澳洲幸运5官方开奖结果体彩网:Restricted stock units (RSUs) are similar, but they represent the c🎶ompany's promise to pay shares based on a vesting sc♕hedule. This offers some advantages to the company, but employees do not gain any rights of stock ownership, such as voting, until the shares are earned and issued.

Performance Shares

澳洲幸运5官方开奖结果体彩网:Performance shares are awarded only if certain specified measures are met. These could include metrics, such as an earnings per share (EPS) target, return on equity (ROE), or the total return of the♌ company's stock in relation to an index. Typically, performance periods are over a multi-year time horizon.