This type of executive benefit grants your top employees stock or an option to get stock in the future if the company does well. This type of executive benefit can help you retain and motivate key employees, because it gives them a stake in the success of your business.
Stock-based compensation programs have decreased in popularity in recent years, and many executives may find stock a less attractive means of getting compensated for top performance since the economic crisis that began in 2007-2008 caused stock to lose value at many companies. Rewarding executives with company stock also requires a high degree of financial transparency and reporting (including an expensive annual company valuation), and should be done with the awareness that you are granting these employees partial ownership of the company and giving them potential decision-making power.
There are two ways to offer shares of your business to key employees in the form of stock:
- Stock options, which give the employee the right to purchase a number of shares in the company at a future time. The shares are usually offered at a predetermined, locked-in price. The employee must wait until the options "vest" to exercise his or her option to buy the stock, usually three to five years, or vesting might not occur until certain individual or company goals are met.
- Restricted stock, which gives employees outright access to a specific number of the company's shares. After a vesting period, the stock belongs to the employee. He or she does not have to buy it.
If your business is smaller and privately held, you may choose instead to offer phantom stock or stock appreciation rights as executive benefits.
- Stock appreciation rights (SARs) entitle your key employee to a bonus if your business posts positive financial results over a specified period. The bonus can be paid in cash or stock, and its amount is determined by multiplying the company's stock appreciation by a certain number of shares.
- Phantom stock grants an executive a certain number of "units of value," which increase or decrease in value according to the company's stock performance. After an agreed-upon time period has passed, the employee gets the cash or stock based on the phantom stock performance, as well as the base value of the stock.