A group of five people stand in a room with cream-colored walls and frosted paned windows. Two of the men in the group (one wearing a navy blue suit and one wearing a light blue button-up shirt) shake hands while the other three people watch and smile.
Offering company equity as part of your employees' compensation package can encourage better work performance and increase loyalty to your business. — Getty Images/Lacheev

A competitive job market makes finding and keeping good team members more challenging than ever. They're wooed away by organizations offering higher pay and benefits packages. Consequently, over 80% of small business owners view employee benefits as "a top strategic priority," according to a Lincoln Financial Group survey.

Public and private businesses, like family-owned organizations, can offer employees equity incentives. These plans allow entrepreneurs to retain control over the company (if desired) while boosting compensation and benefits packages. Although individuals can't trade private business equity on a stock exchange, non-cash payments have other advantages. Learn how you can give employees company equity and why leaders do so.

Business equity basics

Equity refers to the value of your business or stock shares. It's a key metric for measuring your company's financial health. Your balance sheet shows equity, which is total assets minus total liabilities. Shareholder equity represents shareholders' value if a business liquidates all assets and pays all debts. Alternatively, an organization can calculate the cost of equity and debt to find the project's return on investment (ROI).

Public and private corporations or limited liability companies (LLCs) can give employees equity as part of a benefits package with common or preferred stock options. Another possibility, often used by cash-light startups, is to offer employees equity as compensation, a form of non-cash payment.

[Read more: Small Business Employee Benefits: Everything You Need to Know]

Ways to give workers equity in your company

There are several ways to offer long-term equity incentives to your staff, including qualified and nonqualified plans. Each option has advantages and drawbacks, affecting taxes and company control. In addition to financial benefits, workers may have full or partial ownership of your company. Equity plans range from simple to complex, and state and federal laws may regulate your benefits program. Your accountant and lawyer can help you understand and choose the best options for your business.

Public and private businesses, like family-owned organizations, can offer employees equity incentives.

Types of broad-based equity compensation include:

  • Employee stock ownership plan (ESOP).
  • Restricted stock awards or units.
  • Stock options.
  • Equity bonuses.
  • Phantom stock.
  • Profit-sharing.
  • Stock appreciation rights (SARs).

The importance of equity plan design

Having the right benefits strategy can keep your business competitive and ensure you're meeting worker expectations. However, different techniques impact the success of your program. For example, a Morgan Stanley report found that 35% of public companies offer discounts and lookbacks for worker stock purchase plans. Likewise, 32% provide "shorter and more flexible vesting schedules that cater to employees' needs."

Work with an advisor to create a shareholder agreement that provides the best benefits for your employees and company. It should define who it's available to and what happens when employees leave your business.

Your equity plan communications strategy also affects employees. Employee education and frequent communication can help workers understand the value of their benefits and encourage them to take an active role in operations. Human resource leaders should monitor worker engagement with programs and look for ways to increase involvement.

[Read more: 4 Smart Enhanced Employee Benefits To Kickstart Recruiting]

Why small businesses offer equity to employees

The bottom line is that it's hard for a small business to keep reliable, skilled staff. More money and better benefits can help, considering that 81% of respondents to a Harris poll for Fortune want employee retirement contributions as part of their benefits package. Indeed, almost one in three Morgan Stanley respondents said, "the number one goal for offering equity compensation is to attract and retain talent."

Furthermore, 80% of business decision-makers "believe the importance of equity in compensation programs will increase over the next five years." Giving equity can increase loyalty among staff and improve operational performance. According to SHRM, equity compensation encourages staff "to perform in the best interest of the company" while conserving "capital by paying lower cash compensation." Of course, employee stock ownership plans also provide tax savings. TurboTax said, "employer contributions are deductible, up to 25% of the payroll covered by stock ownership plans."

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

To stay on top of all the news impacting your small business, go here for all of our latest small business news and updates.

CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.

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Published October 25, 2022