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Equity Compensations: Four Plans Every Employee Should Know

Equity Compensations: Four Plans Every Employee Should Know

4 Types of Equity Plans

Equity plans are popular among employers.

Equity Compensation has been very popular among employers in the Silicon Valley for many years. These plans provide innovative options for employers to motivate their employees and assist in creating a positive work environment.  Stock options and financial incentives are attributes that job hunters look for when searching for a quality workplace, but with various plans and options in existence it can be overwhelming to try and understand all the options that an employer can offer their team members.

There are four common types of equity compensation plans:

Restricted Stock Unit: A restricted stock unit involves a company giving employees a designated amount of shares at no cost. These shares eventually become vested after a pre-determined amount of time and what this means is that ownership does not occur until the shares are fully vested. This plan is often merit based and is a form of deferred equity compensation used to promote loyalty among employees as well as to retain quality and skilled team members.

Restricted Stock Award: A restricted stock award is very similar to the restricted stock unit. In this case, a company grants a determined amount of shares also at no cost but instead of ownership occurring after a vesting period it occurs at the time of the grant. Typically, the shares are released to the employee over a three to four year vesting period and the purpose is to monitor employee performance as well as to encourage future quality of work. 

Employee Stock Purchase Plan: An employee stock purchase plan usually involves a voluntary salary deduction of up to 15% of an employee’s salary to be deducted from each paycheck; the funds are  placed in a non-interest bearing account. The money deducted during a pre-determined amount of time is used to purchase company shares at a discount from the fair market price. This plan allows the use of an employee’s own money to purchase shares with low risk.

Employee Stock Option: An employee stock option is a tactic used by companies to motivate short-term goals among their employees. A number of shares are reserved for employee purchase and are vested over time, allowing growth and company value to build. It encourages employees to behave in ways that boost the company’s stock value.

All of these plans have tax implications for both the employee as well as the company and must be reported in an accurate and timely fashion to various tax authorities.

Equity compensation plans can be difficult to understand and while the four basic plans have been introduced in this post, it is best to seek professional advice if you are considering implementing a plan or if you have questions concerning your own plan. Here at Stock Connections we specialize in equity compensation plans and we encourage you to contact us with your questions. We are happy to help. 

Photo Credit: khrawlings

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