Employees as Shareholders
Equity grants are used in Silicon Valley for retention, alignment, and compensation. This should be the new normal.
Shareholders, customers, or employees. We’re often told that companies can only prioritize one and most MBA graduates will tell you that companies usually prioritize shareholders. And yet, while this has led to all-time highs in the stock market, climate change is only getting worse, income inequality is at dangerous levels, and society continues to operate with tensions present from decades prior. While the current conversation revolves around finding ways to balance the three constituents, perhaps there is value in finding ways to integrate the three instead so they become one and the same.
There are several reasons for the success of Silicon Valley. Some of them can be simplified down to the talent pool, the proximity of competitive universities, and the abundance of venture capital. But one key component that has added to Silicon Valley mentality is the liberal usage of the employee share option pool — a tool initially used to allow startups be competitive against larger companies by providing additional compensation that could offset lower base salary, increase retention by having employees vest into their plan, and (most importantly) create alignment of interest with shareholders (investors and founders) by giving employees ownership in the company they are working to build.
As one can imagine, offering equity into a company as part of overall compensation can be quite impactful to an employee, as this often becomes the pathway to upward mobility when the company is successful. Typically, if the valuation or market capitalization of a company multiplies by 10 during the tenure of employment, the employee won’t get a raise 10 times their salary — in fact, they’ll be lucky if they get double their base salary at all. But their equity will have multiplied by 10 and what hypothetically would have been a $100,000 equity grant over 4 years can become valued at $1M. Even better, if an employee holds their stock for over a year, their tax from selling this form of compensation can be assessed as long-term capital gains rather than income (not legal or tax advice, please consult a professional).
What happens when an employee is compensated with stock options in addition to base salary is that they are no longer just employees — they are shareholders also, which simplifies the constituents balancing act for the company and treats employees as important stakeholders in the journey. This is already commonplace at the executive level, and often how many executives are able to earn hundreds of millions of dollars in compensation even though their annual base salary might be as low as $1. It’s time that more companies take on what has been an invaluable tool in Silicon Valley and turn it into something that gets deployed in every company across the US.
Just as companies are mostly required to provide health insurance and retirement planning to employees, a law should be considered that requires employers under certain categories to issue equity into their company that would allow them to participate in the growth of their organization (assuming the company has accepted investment from outside investors). This would assist in bringing us to a better place in many of the areas that are currently social concerns. Income inequality, giving employees a voice in corporate affairs, weakening the strength of private equity, etc. would all be addressed with this change.
This is not something that is likely to occur organically. Neither executives, board of directors, nor shareholders/investors are incentivized to allow this to occur as it dilutes the ownership percentage of these stakeholders without adding tangible market value to the firm. Therefore, it will require a push from either the people and/or the government to put this change in place. But when we see what has happened in the last few decades where the economy is stronger than ever due to the rise of large companies but employees have a lower standard of living than before, something has to change and transforming employees into shareholders is one place to start.
