Why doesn't my employer offer me equity compensation?
If your employer is a for-profit corporation, it probably can offer stock options, restricted stock, or other types of equity compensation to its employees. There may, however, be definite reasons why your company is not offering stock grants. For example, your company's approach to compensation may not include them, or it may not even have a stock plan. Perhaps it does not offer employees options or stock because the owners or majority shareholders of the business do not wish to dilute their ownership and control.
Public companies with stock option and/or restricted stock plans have grant guidelines that they follow, and you may not be eligible. In general, public companies have narrowed the eligibility for grants. When setting guidelines, companies consider certain criteria and information, including the practices of industry competitors, salary grade/rank, position or role, and the total number of available shares. In many companies, stock option plans are limited to management or other key employees, as surveys indicate.
Instead of stock options, your company may instead grant restricted stock, restricted stock units, performance shares, or stock appreciation rights or may have an employee stock purchase plan. If you do not know whether your company has a stock plan, ask the director of human resources, the head of your benefits department, or the company's chief financial officer. Surveys show that employees value equity awards.
Private Companies And Other Legal Entities
In private companies, it may be impractical or unrealistic to offer stock options or restricted stock because of the nature of the business. Unless an IPO, sale, merger, or other liquidity event gives your stock meaningful value, your company would need to have special buyback provisions or create a market for shares issued upon the options' exercise or vesting. Otherwise, its employees would not perceive the stock or options as valuable. Buying back appreciated shares is expensive.
For S-corporations, in Private Letter Ruling 201918013 the IRS clarified that employee stock options do not create a second class of stock. These types of closely held private corporations are permitted to have only one class, and it must confer identical rights to all shareholders. For a discussion of this, see a commentary from the CPA firm Dowell Group.
Another alternative in a private company is phantom stock, which offers some of the features of a true equity grant but without causing share dilution. Limited liability companies (LLCs) can also make grants of ownership in the form of profits interests and capital interests.
Encouraging Equity Grants At Startups
The biggest difference between the compensation practices of publicly traded companies and those of private companies is the use of equity. An open letter from executives at some of the most successful startups in Europe urges local governments to improve their laws to make employee stock options (and presumably other equity awards) easier to grant and receive. It succinctly explains the importance of equity grants at all startups: "This isn't just a perk on top of a salary: universally, stock options reward employees for taking the risk of joining a young, unproven business, and give them a real stake in their company's future success. Stock options are one of the main levers that startups use to recruit the talent they need; these companies simply can't afford to pay the higher wages of more established businesses."