What is 'Equity Compensation'
Equity compensation is non-cash pay that represents ownership in the firm. This
type of compensation can take many forms, including options, restricted stock
and performance shares. Equity compensation allows the employees of the firm
to share in the profits via appreciation and can encourage retention, particularly
if there are vesting requirements.
'Equity Compensation'
Equity compensation has been used by many public companies and some
private companies, especially startup companies. Recently launched firms may
lack the cash or want to invest cash flow into growth initiatives, making equity
compensation an option to attract high quality employees. Traditionally, tech
companies in both the start-up phase and more mature companies have used
equity compensation to reward employees.
Example
For instance, LinkedIn's stock-based compensation in 2015 was $510.3 million,
up from $319.3 million the prior year. In 2015, it represented over 17% of
revenue. Over $460 million of the total was in the form of restricted stock units
(RSUs).
Common Types of Equity Compensation
Companies that offer equity compensation can give employees stock options
that offer the right to purchase shares of the companies' stocks at a
predetermined price, also referred to as exercise price. This right may vest with
time, allowing employees to gain control of this option after working for the
company for a certain period of time. When the option vests, they gain the right
to sell or transfer the option. This method encourages employees to stick with
the company for a long term. However, the option typically has an expiration.
Employees who have this option are not considered stockholders and do not
share the same rights as shareholders. There are different tax consequences to
options that are vested versus those that are not, so employees must look into
what tax rules apply to their specific situations.
There are different types of equity compensation, such as non-qualified stock
options and incentive stock options (ISOs). ISOs are only available to
employees and not non-employee directors or consultants. These options
provide special tax advantages. With non-qualified stock options, employers do
not have to report when they receive this option or when it becomes exercisable.
Restricted stock requires the completion of a vesting period. This may be done
all at once after a certain period of time. Alternatively, vesting may be done
equally over a set period of years or any other combination management finds
suitable. RSUs are similar, but they represent the company's promise to pay
