Why Equity Compensation is So Valued By Employees
In this week’s article we are going to get a little more general. Specifically, I want to cover why Equity Compensation is so valued by employees who have positions in Equity Compensation. Although we are staying general, I will be touching on some specific reasons.
If you’ve read any of Equity Compensation articles, you know how I like to give a little background. Well, this one will be no different. In this case, I will do my best to keep it short and sweet. It is simply a reminder that when I am talking about Equity Compensation, I am referring to company stock that is awarded and/or made available to you through your employer. In my world, I focus on publicly traded companies, but this can also apply to privately held ones. Regardless, I am concentrating on Equity Compensation positions acquired through avenues including Employee Stock Purchase Plans, Restricted Stock Units, Restricted Stock Awards, also just known as Restricted Stock, and last but not least, Non-Qualified Stock Options. However, to keep things simple for this episode, I am just lumping them all together as Equity Compensation. With that background, let’s get to it.
A few years back, in 2017 specifically, Charles Schwab released a study as to why participants value Equity Compensation so much. Actually, they update this information on a regular basis, however, the main parts I will be referencing come from the 2017 study.
There are three specific reasons why employees value Equity Compensation so much. I will be sharing these in order of highest rating per the study. After I get through with sharing the three primary reasons, I will spend some more time talking about some other findings in the Schwab studies.
The first and highest rated reason is because Equity Compensation helps employees build wealth. Specifically, the study results said to “significantly build wealth.” This came in at 55%. Honestly, I am surprised this number is not higher. Maybe it is dependent on how Schwab structured the actual surveys, which I don’t have access to. All I see are the results. Sorry, I must be flashing back to too many statistics and survey classes in grad school.
Reason number two for why Equity Compensation is so valued by employees is this allows them to participate in the company’s growth. It came in at 52%. Now, I am assuming growth means the growth of the stock here. I say this because a company can grow in revenue but it’s stock may not move in the same direction. You know, pooper stock as one of my Equity Compensation calls it. The company does okay, but the market just does not love their stock so it stays flat. Regardless, let’s assume this answer is more about the company stock going up in value.
The third and final reason to value Equity Compensation is Greater Control. This answer came in the 40% range. Sorry, I don’t recall what the actual number was beyond the 40% range. However, this answer needs to be broken down a tiny bit more. Respondents said they value Equity Compensation because it gives them Greater Control over both Personal Finances and also their Financial Decisions and Rewards. I guess you say this makes them more involved.
A final comment on the findings of this study. Employees said that having access to Equity Compensation was an “essential or very important benefit.” Basically, employees who have it love it.
As I mentioned, those are the primary findings of the Schwab study on why employees value Equity Compensation. Feel free to jump off now, however, I am not done. I want to get into some more findings from a study done more recently on Equity Compensation. Again, it touches on why it is so important. I do need to mention first to recognize some of this data from 2020 may be a bit distorted due to Covid. Things like account balances and more may have been affected due to withdrawals for emergencies. Regardless, I think you will find some interesting information here.
Let’s start with some data that definitely changed as a result of Covid. In 2019, 60% of respondents said the long-term plan was to use their Equity Compensation for retirement. This number dropped to just over 50% in 2020.
The financial stress of Covid had a big impact on what people were doing with their Equity Compensation. Financial goals related to Equity Compensation changed especially regarding debt and short-term emergencies. In 2019, only 5% of respondents planned to use Equity Compensation to pay off debt. This number nearly doubled in 2020 to 9%. The percentage for using Equity Compensation for short-term emergencies also rose. In this case, it went from 5% to 7%.
How about we talk about how attractive Equity Compensation is for bringing on and keeping talent. I guess this section is for employers and maybe HR people specifically. Just over ¾ of employees say Equity Compensation is an attractive benefit. Not a surprise based on what I have shared so far. Now, this next data point really caught my eye. In 2019, 28% of respondents said Equity Compensation is the main reason or one of the main reasons they took their job. This number jumped to 37% in 2020. I don’t know about you, but this is a large increase to me. This percentage only increases as employees get younger. Over half of Millennial respondents agreed to this response of wanting Equity Compensation as the driver of why they chose their current job. Again, pay attention employers!
I’ve talked lots about Concentration Risk, which I see often with Equity Compensation. The Schwab study shed a bit more light on this. On average, Equity Compensation makes up 32% of an employee’s net worth. Again, for younger employees this number increases. It is 43% for Millennials. In case you are wondering, it makes up 30% of the net worth for GenX and 21% for Boomers. Unfortunately, the study does not provide any insight on why the numbers are lower for older employees. I am going to be optimistic and assume as employees get closer to retirement they reduce their risk and dispose of some of the highly concentrated positions. Let’s hope my optimism is correct.
A final piece of information from the Schwab studies I feel is important enough to highlight. We know employees value it and seek it out as they are deciding where to work. 85% of respondents want their employer to provide more education related to their Equity Compensation. So, out of 1,000 respondents in this survey, almost 9 out of every 10 participants think their employer should provide more education. That is eye opening to me and not at the same time. As someone who caters to the world of Equity Compensation, I know there are a lot of resources available to employees. However, at the same time, I know many employees think the existing educational resources are not adequate. Maybe this is a case of what the employer thinks is the right solution is not the same as what the end user wants. I’m not sure how to resolve this difference besides continuing to create resources on my end. Maybe you can help me by spreading them out.
Alright, that’s enough for this episode. Hopefully you learned something new about why Equity Compensation is so valued by employees. I know I learn something every time these types of surveys get updated. The two biggest takeaways for me are the need for more employer-based education and how younger employees value Equity Compensation more than older employees. Regardless, we all know it is a valued benefit and it seems this will continue to be one.
As always, thanks for taking the time to read this. Please do not hesitate to reach out if I can be of help with your equity compensation-related questions. The easiest thing to do is to click the little green box that reads “Schedule a Meeting” that can be found at the bottom of every page on my website. Or, just click my Calendly link right here.
I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.