Our Guide To Employee Equity Compensation Plans 

Getting a competitive salary is important, but prospective employees should look at their employer’s benefits package as part of their compensation. Equity compensation plans, if provided, are potentially among the most valuable features of your package.

There is often low employee enrollment in equity compensation plans when given an opt-in choice, like for a company’s employee retirement plans.

1. Employee Stock Ownership Plan or ESOP An ESOP is a stock benefit plan and is among the most common forms of employee ownership. This plan covers 14.2 million people working predominantly for privately held companies.

How ESOPs Work

Your employer makes tax-deductible gifts of company stock, not options, into a trust allocated into individual employee accounts. Typically, there is no public market for these shares. Upon leaving or retiring, an employee gets their stock and then sells them back to the company for cash.

2. Employee Stock Purchase Plan or ESPPs

An ESPP, a relatively common company-run program, is broadly offered as a component of employee benefits. Unlike the ESOPs given by private employers, public companies offer ESPP. With an ESPP, the employees purchase shares usually at a discount based on an offering plan.

What Is An ESPP?

An ESPP plan allows employees to buy their company’s stock at a discount price up to 15% of their salary but no more than $25,000 annually. Employees contribute via their paycheck. Contributions typically are 1-10% of wages. It is a good way for employees to participate in the success of their company.

3. Restricted Stock Units (RSUs)

Restricted Stock Units or RSU’s have been around for decades. Private or public companies may offer this popular form of employee compensation. They are also the most common form of time-based full value awards (84%) by companies. Given these statistics, employees may seek these performance-based awards.

How RSUs Work

RSUs are stocks given as an award to you by your employer. Employees do not purchase their shares, and it may take several years before employees see value from its award. They represent a contractual right to receive shares or a cash equivalent amount as an allotment

4. Employee Stock Options (ESOs)

Many employers grant stock options to attract and retain select employees, particularly in start-ups or fast-growing companies. If you are among those employees at the company’s early formation, you may be in an enviable position to benefit from a potential public offering.

How ESOs Work

An employee stock option is a gift similar to receiving a bonus from the company. The employee is not purchasing the option but may benefit from the appreciation of their employer’s stock. Employers are not giving the employee the stock directly. Instead, employers are offering employees call options.

Increasingly, an equity compensation plan is a valuable part of your company’s benefits. Prospective employees often seek an equity compensation plan as an incentive to work at the company.

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