Contact Us

If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.

Please fill out the contact form below and we will reply as soon as possible.

  • Courses
  • Tutoring
  • Home
  • Law, Transactions, & Risk Management
  • Business Transactions, Antitrust, & Securities Law

Equity Compensation - Explained

What is Equity Compensation?

Written by Jason Gordon

Updated at April 15th, 2022

Contact Us

If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.

Please fill out the contact form below and we will reply as soon as possible.

  • Marketing, Advertising, Sales & PR
    Principles of Marketing Sales Advertising Public Relations SEO, Social Media, Direct Marketing
  • Accounting, Taxation, and Reporting
    Managerial & Financial Accounting & Reporting Business Taxation
  • Professionalism & Career Development
  • Law, Transactions, & Risk Management
    Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
  • Business Management & Operations
    Operations, Project, & Supply Chain Management Strategy, Entrepreneurship, & Innovation Business Ethics & Social Responsibility Global Business, International Law & Relations Business Communications & Negotiation Management, Leadership, & Organizational Behavior
  • Economics, Finance, & Analytics
    Economic Analysis & Monetary Policy Research, Quantitative Analysis, & Decision Science Investments, Trading, and Financial Markets Banking, Lending, and Credit Industry Business Finance, Personal Finance, and Valuation Principles
  • Courses
+ More

Table of Contents

What is Equity Compensation?How is Equity Compensation Used?Common Types of Equity CompensationExamples of Equity CompensationAcademic Research on Equity Compensation

What is Equity Compensation?

Equity compensation is a non-monetary pay that is related with the ownership in the organization. Employees can receive this compensation in the form of options, performance shares, and restricted stock. It further enables employees to have a sense of ownership and belongingness towards the company, thereby reducing the employee turnover. Also, employees receive a share of the company's profits by investing in shares.

Back To: BUSINESS LAW

How is Equity Compensation Used?

Several public and private companies, especially the budding ones, widely use equity compensation approach. Firms, who have just started, may not have adequate funds, or may seek to make investments for the company's growth. Therefore, they may choose the strategy of equity compensation for tempting prospective employees. Earlier, technology-based organizations, irrespective of their size and experience, used equity compensation for offering rewards to their employees.

Common Types of Equity Compensation

Organizations providing equity compensation to employees can offer stock options to their employees. Stock options give them the right to buy the company's shares at a given price, which is also known as the exercise price. Such incentives allow employees to have control over these shares after having worked for the firm for a set time period. At the time option vests, employees have the right to either sell or transfer the shares. 

This policy motivates employees to build long-term relationships with the company. However, such options have a maturity date. Employees who have the option to vest cannot enjoy similar privileges as stockholders of the company. The vested options carry dissimilar tax liabilities as compared to the ones that are not. Thats why it is important for employees to check what kind of tax laws are applicable in particular situations. Equity compensation has many forms like non-qualified stock options, and incentive stock options. 

Only the employees of a company can benefit from incentive stock options. These options offer exclusive tax benefits. If an employee owns a non-qualified option, they are not supposed to mention the time they obtain the option, or they exercise it. Restricted stocks ask for the fulfillment of a vesting tenure. One can do it in one go after a given time period. Or, one can do vesting in bits and pieces in a given number of years, or as per the requirements of the management. 

RSUs have same properties, except the company agrees to make payment for shares on the basis of a vesting timeline. While it offers benefits to the organization, employees don't receive any privileges related to the company's ownership until they earn and receive shares. Employees receive performance shares when they achieve specific milestones. Such determinants include earnings per share (EPS), and return on equity (ROE), etc. Generally, performance shares have a maturity of many years.

Examples of Equity Compensation

For example, the equity compensation of the professional platform, LinkedIn, increased from $319.3 million in 2014 to $510.3 million in 2015, showcasing a revenue of over 17%. The company's restricted stock units comprised of $460 million of the total share amount.

Back to: Business Transactions



equity compensation

Was this article helpful?

Yes
No

Related Articles

  • Bust-Up Takeover - Explained
  • Collusion - Explained
  • Investment Advisors Act of 1940 - Explained
  • Sophisticated Investor (Securities) - Explained



©2011-2021. The Business Professor, LLC.
  • Privacy

  • Questions

Definition by Author

0
0
Expand