July 18, 2022
Executive Comp: The Basics
For those who are newer to executive compensation, this blog from Global Shares gives a good overview of the terminology – and the drivers behind components of executive pay. Here’s an excerpt describing types of equity awards:
– Stock Options: Stock options provide an employee with the right to purchase a certain number of shares at an initially agreed price after vesting. (i.e. meeting some requirements – service-based or performance-based or both). Suitable for many companies – early stage, high growth startups and publicly traded companies – who want to issue equity broadly or with a group of selected employees.
– Restricted Stock Units: It is a grant of shares to an employee. He/she usually receives them for free but doesn’t fully own them until a vesting period has passed. Suitable for many established companies who want to offer equity broadly or with a group of selected employees without requiring payment upfront.
– Stock Appreciation Rights: It is an award based on the company stock value (They are not stock but are tied to stock performance). Holders receive a bonus in cash or an equivalent number of shares based on how much the stock value increases over a set period of time. Suitable for many companies who want to offer employees compensation without requiring employees’ upfront payment and issuing a large number of extra shares.
The blog goes on to discuss pros & cons of equity vs. cash compensation, differences in attitudes by country/gender/age, and how publicly held vs. privately held companies differ. Check out our “LTIPs & Annual Incentives” Practice Area for more guidance on structuring equity awards.
– Liz Dunshee