Equity-Based Compensation: Is Your HRMS Ready?

A wide-ranging formal compensation strategy is a sign of an employer that takes employee retention and engagement seriously. In the modern workplace, it’s no longer enough to simply offer a competitive salary check at the end of the month. People expect performance bonuses, spot bonuses, non-cash perks, and so on. And one increasingly popular option is equity-based compensation or, to put it another way, a share in the company itself. Once an option for senior executives only, businesses are now deploying this option at all levels. After all, what better incentive to work than to have a stake in the company itself?

One of the latest employment law developments in the UK encourages this trend towards equity-based compensation. The 2013 Growth and Infrastructure Act creates a new employment status, that of “employee shareholder”. This type of employment contract grants between £2,000 and £50,000 of company shares in exchange for giving up certain core employment rights, including most unfair dismissal rights and the right to statutory redundancy pay. If your company looks set to prosper exponentially, this could be a very attractive option to top talent.

A Sophisticated Software Strategy

Of course, the more complicated your overall compensation strategy, the more sophisticated your HR software needs to be. Within your HRMS, you may well have functions that manage the more common compensations, such as salary, performance-related pay, geographical weighting, and one-off lump sums, all linked to job roles and the corporate hierarchy. But as the rarer, more niche elements such as equity options come into wider play, you’ll need a system that can handle the rules and processes surrounding not only eligibility but also vesting, cliffs and acceleration.

Vesting is the process of receiving the agreed equity-based compensation over a period of time rather than all at once (aids retention and commitment). A cliff is an initial period during which the employee receives no equity (for example, they don’t start receiving the agreed equity until they’ve been with the company for 12 months). Acceleration is the name for circumstances under which you might grant the full agreed equity more quickly (for example, you sell the company).

You may not have equity-based compensation options in your reward strategy today, but as we said earlier, they are becoming more and more common. It’s never too soon to take a look at your HRMS capabilities and decide whether they can support you if you go down this route in the future.