Editor’s note: The perspectives expressed in this commentary are the author’s alone. The following is a paid thought leadership piece from The Plaza Group at Morgan Stanley.
Your employees want to build their wealth and be better employees. Here’s how your equity program can help them get there.
Every organization wants to find the right combination of employee benefits that help increase workers’ motivation, loyalty and performance. A well-designed equity compensation plan can be a critical piece of that puzzle. Workers who participate in equity plans have the opportunity to build wealth and feel more engaged at work. That can translate to better job performance and greater commitment to the organization.
However, you can’t simply create an equity compensation program and hope for the best. We consulted with Professor William G. Castellano, PhD, chair of the Rutgers University Human Resources Management Department, about how organizations can boost equity participation and employee share ownership. Here are four ideas he shared for building a program that helps employees build wealth and manage financial risks:
Employers should use equity compensation to enhance existing wages, rather than substitute for salary. When wages are at or above market levels and employers offer equity compensation as an additional benefit, workers are likely to view it as a “gift” on top of their salary—and they tend to reciprocate with higher effort and cooperation at work, Castellano says.
On the other hand, offering equity in lieu of market wages can have the opposite effect: Employees feel less motivated and less committed. They may also feel less secure about their financial situation, as their fixed wages are effectively reduced and more of their wealth is tied to company performance, a variable that can be hard to predict or fully control.
When employees view the equity they receive as part of their compensation, as opposed to a longer term benefit, it can lead to short-term decision-making. For example, they may be more likely to cash out their vested shares to fund short-term income needs, which can be a detriment to their long-term savings goals such as funding their retirement.
To limit this possibility, consider providing a short-term profit- or gain-sharing program alongside long term equity compensation. Longer equity vesting periods, for example, can encourage employees to accumulate equity over an extended timeframe and help them keep their focus on the organization’s long-term results, not just its short-term performance.
Just as it’s important for employers not to substitute wages for equity participation, it is equally important not to substitute retirement benefits for equity rewards. Having a separate and diversified retirement portfolio, in addition to equity, can help reduce the risk to employees that their wealth is overly concentrated in too few assets that can fluctuate in value.
Using equity to instead supplement retirement benefits can help employees feel more secure in the idea that they have a wider financial safety net, if one of their investments falters. And when employees feel more secure, they are more likely to participate in equity programs and feel higher levels of job satisfaction, motivation and company loyalty, notes Castellano.
For publicly traded companies, employees are of course free to buy their company’s stock on the open market with their own savings. However, Castellano notes that when employees instead receive shares as grants from their employer, or have the opportunity to purchase shares at a discount through stock purchase plans, they tend to perceive these holdings more as long-term investments. That perception can help employees work toward their own long-term savings goals and stay focused on the company’s long-term financial health.
Help your employees focus on the future
Any organization seeking to boost equity participation and employee share ownership today needs to consider how they can structure their equity programs to achieve these ends. Focusing on strategies that help workers accumulate wealth and manage financial risks can ultimately be a win-win, helping employees focus more on both their financial future and the long-run success of their organization.
Dr. Bill Castellano is not an employee of Morgan Stanley Smith Barney LLC. His opinions are solely his own and may not necessarily reflect those of Morgan Stanley Smith Barney LLC or its affiliates.
Dr. Bill Castellano is Professor of Strategic HR Management at Rutgers University School of Management and Labor Relations. He is also the Executive Director for the Center for Employee Ownership and an Executive Committee member of Rutgers Institute for the Study of Employee Ownership and Profit Sharing. Bill also serves as a board member of the Global Equity Organization. Bill is the former Chair of the HR Department, Associate Dean of External Engagement and Executive and Professional Education, and former Director of the Center for HR Strategy. His research, teaching, and consulting activities are focused on understanding the impact of employee ownership and equity compensation strategies on individual and organizational outcomes, the strategic management of human capital, employee engagement, and the development of leaders for the challenges of the 21st century. Bill has over forty years of experience working in corporate Fortune 50, entrepreneurial and research environments. Before joining Rutgers University, he held senior HR management positions at Merrill Lynch and Manufacturers
Hanover Trust, where he was involved with human resource strategies and practices that supported both individual business groups and the global enterprise. Bill is an accomplished researcher publishing his work in practitioner and academic journals, and is a frequent speaker at national HR and business conferences.
Disclosure:
Article by Morgan Stanley and provided courtesy of Morgan Stanley Financial Advisor.
The Plaza Group at Morgan Stanley is comprised of Teri L. Salach, CIMA®, CWS®, Wealth Advisor, Sheila K. Davis, CFP®, Financial Advisor, Jennifer L. Denning, CFP®, Financial Advisor, and David M. Salach, Financial Advisor, in Leawood, KS at Morgan Stanley Smith Barney LLC (“Morgan Stanley”). They can be reached by email at [email protected] or by telephone at (913) 402-5264. Their website is http://advisor.morganstanley.com/theplazagroupkc.
This article has been prepared for informational purposes only. The information and data in the article have been obtained from sources outside of Morgan Stanley. Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of the information or data from sources outside of Morgan Stanley. It does not provide individually tailored investment advice and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it.
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