UPDATES! Why do companies grant stock options, restricted stock, and other equity awards? Do employees really value them?
A company may grant equity awards for a variety of reasons:
- Attracting and retaining valuable employees.
- Motivating employees to work harder to increase the value of the company and its stock price.
- Aligning the financial interests of employees with those of shareholders.
- Conserving cash by paying part of compensation in stock options, restricted stock, stock appreciation rights, or other stock grants.
- Creating an ownership culture.
- Keeping its compensation package competitive with others in its industry and geographic area.
In a message to employees, the CEO of Apple, Tim Cook, nicely expresses the importance of stock grants and the reasons for awarding them:
"I'm excited to let you know that we're also increasing our investment in our most important resource—our people. You are the heart and soul of Apple and we want you to share in the success made possible through your efforts. Your dedication helps Apple make the best products in the world, surprise and delight our customers, and ultimately make the world a better place. To show our support for our team and our confidence in Apple's future, we’ll be issuing a grant of $2,500 in restricted stock units to all individual contributors and management up to and including Senior Managers worldwide. Both full-time and part-time employees across all aspects of Apple's business are eligible."
Surveys Show Common Reasons For Granting Equity Awards
In its 2016 Domestic Stock Plan Design Survey, the National Association of Stock Plan Professionals (NASPP) found that the following were the most commonly reported corporate reasons for granting stock options and restricted stock/RSUs.
|Reason for making grants to employees or executives||For stock options (% of companies)||For restricted stock/RSUs (% of companies)|
|Align with shareholder interests||79%||82%|
|Remaining competitive with industry peers||69%||78%|
|Fostering a culture of employee ownership||34%||40%|
|Reward for meeting specific performance targets||22%||47%|
|Normal practice at hiring||19%||30%|
In 2016, E*TRADE surveyed more than 43,000 stock plan participants and found that most of them like their equity compensation and feel it enhances their commitment to their companies. About 40% of the respondents said that stock comp would be a factor in deciding whether to stay in their current job or take a job with a different company.
In 2016, a survey of more than 2,000 stock plan participants by Fidelity Investments found that employees who participate in company stock plans tend to be "more loyal and motivated." Moreover, Fidelity concluded that "participants who are more knowledgeable about their stock plan have higher satisfaction."
- The majority (63%) of the surveyed employees reported that stock plan participation gives them "a sense of ownership in the company."
- More than half (53%) of the respondents indicated that company stock plans have strengthened their loyalty to the company.
- An almost equal percentage (52%) agreed with the statement "I work harder knowing my stock plan will reward me for my company's performance."
- Just under half of the surveyed employees indicated that when they are considering a new job, the presence of a company stock plan is a major attraction.
A 2014 survey by Fidelity demonstrated that many employees not only value stock plans highly but also now expect them as an employment benefit, especially when they are considering a new job. Fidelity's findings on the value of stock plans to employees include the following:
- 82% of the surveyed employees say an attractive stock plan is something they want a new employer to have.
- 40% stated outright that they would not consider a new job opportunity unless the company offered a stock plan (86% of the survey respondents under the age of 40 felt this way).
- 10% stated that their company stock plan is worth more to them than any other employment benefit, including medical insurance and 401(k) plans.
- 57% of the respondents asserted that the company stock plan has elevated their loyalty to the company, and 54% said that it makes them work harder.
- 37% of US respondents and 35% of non-US respondents agreed that "Giving up my current stock plan benefits would make it difficult for me to change jobs/companies."
In the 2014 iQuantic Global Long-Term Incentive Practices Survey by Buck Consultants, which surveyed 107 companies in 40 countries, respondents reported the following purposes as major reasons for granting equity awards.
|Reason for making equity awards||Percentage of companies|
(up from 67% in 2013)
|Acquisition or merger||50%|
|Recognition of excellent job performance||60%|
|One-time broad-based grant||50%
(up from 33% in 2013)
|Special skill set||50%
(up from 19% in 2013)
|Filing of patent||7%|
(up from 6% in 2013)
The compensation/HR organization WorldatWork, along with the Performance and Reward Centre and Hewitt New Bridge Street, surveyed 844 mostly American and British companies to ascertain their use of stock plans and their attitudes toward them. (See Employee Equity Plans: Do They Have A Future?) More than half of the responding companies make stock grants to employees. Over 60% of the companies operate employee stock purchase plans. The following table shows the primary reasons that the surveyed companies cited for granting equity awards, and the percentage of companies that gave each as the primary reason for a particular type of stock compensation.
|Primary reason||Stock options||Restricted stock/RSUs||ESPPs|
|Align interests; get employees to focus on share price||45.28%||47.10%||61.69%|
|Attract and retain employees||22.64%||30.32%||7.46%|
|Needed for competitive rewards/benefits package||14.47%||7.10%||8.96%|
|Create wealth for employees||2.52%||3.87%||6.97%|
|Corporate tax efficiency||2.52%||3.23%||4.48%|
|Align employee awards with executive awards||0.63%||2.58%||1%|
A Morgan Stanley survey of employees with equity awards found that 59% of the respondents regard their grants as a major part of their compensation. Even more (82%) think that operating a stock plan is a smart business move for their company. Most of the survey respondents (92%) expressed satisfaction with their companies' stock plans, and 65% praised their stock plans as "extremely or very valuable" employee benefits.
A UBS survey (UBS Participant Voice: The UBS Equity Award Value Index) presents a number of interesting findings which show that the more experience employees have with equity awards, the more they value them and are motivated by them. For example, while the survey found that at least some employees at every level of vesting experience perceive equity compensation as "a way to build wealth," more than half (55%) of the respondents with six or more vesting experiences felt this way.
Equity Compensation Can Even Boost Innovation And Operational Efficiency
Academic research has found that companies offering stock options to nonexecutive employees are more innovative (see "Non-executive employee stock options and corporate innovation" in the Journal of Financial Economics). Companies in the 75th percentile for stock options per employee applied for 96% more patents and received 105% more quality-adjusted patent citations than companies in the 25th percentile did.
In an unusual twist on common practices, the newly public company Gardner Denver Holdings (backed by private equity firm KKR) granted $100 million in shares to 6,000 employees not already part of its equity program. This included hourly workers and staff in customer service and sales, with equity grants equal to about 40% of their annual salaries. Employees, including managers, own about 10% of the company. A Bloomberg news report on this development quotes Pete Stavros, head of KKR's industrial team and chairman of Gardner Denver, who said that employee ownership at manufacturers can be effective at improving operations in which the company needs to do a "a million things a little better." He observes that "it's the workers on the front lines that often know where the inefficiencies are to fix and they share in the success through their equity stake."