Equity Based Compensation

A discussion in CiteHR http://www.citehr.com/284260-design-equity-based-compensation-start-up.html

The compensation of company is driven by several factors including market competitiveness, cost containment, internal equity, transnational mobility and compliance. The performance of company directly depends on the performance of its assets. Hence, designing an empirical compensation structures which would drive performance. This structure is known as Equity Based Compensation. This allows an employee to opt for the stock options. This program ensures an equal distribution of profits between the shareholders and employees.

The steps to design it begin with setting a time-limit, such as five years during which the employee needs to work in an organization. There would be a cap to the equity, mentioning the percentage for each role and level. The rewards for performance achievements in a year need to be designed in it. For e.g. : there can be a Business Performance Equity designed at 12 % of the market rate or share price valuation of the company ,which needs to accumulates for five years for the employee to claim it. In addition to this, a solution Equity is designed , for the employee ,to target any remarkable service or solutions offered to the company, such as new product designed or gross sales increase and etc. The solution equity would be defined by a specified percentage of the fixed salary, e.g. 120% of the base salary or basic. The roll out for the incentive can be directly tied to the cash-flow cycle of the company to negate the strains on it. As defined by Thomas J Hackett and Donald G McDermott, “The plan detailed specific goals for company revenue, earnings before interest and taxes (EBIT), and profitability. Based on the plan, the sooner the company achieved its EBIT targets, the sooner each executive entitled to a percentage of the EBIT generated. The executives could then choose to receive payment in either cash or additional equivalent shares of company stock based on valuation at that time.” The taxation can be set are per the compliances .Generally an employee do not get taxed when the shares are credited. It would become taxable when the employee sells it, strictly according to the taxation guidelines. The structure needs to be deigned keeping the International mobility in mind. A hybrid form may be introduced in case the employee is put into the expat program. The employee would become taxable as per the country’s governance. Hence the structure needs to be designed so that the base salary can make up with the market competitiveness and cover the shortfall modestly.

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