Equity Compensation: Why Millennials Like It and How Entrepreneurs Can Use It

March
18, 2021

4 min read

Opinions expressed by Entrepreneur contributors are their own.

Entrepreneurs already have to muster a great deal of time and energy to get their businesses off the ground. Covid-19 hasn’t done them any favors: A survey by Alignable in September 2020 found that 60% of small businesses were still suffering financially from the pandemic and 42% of owners were at risk of closure.

It is not clear how much federal stimulus can change that outlook until consumer confidence rebounds, but with or without a recession, entrepreneurs will continue to find that payroll costs often compete with other strategic priorities. If they do have the cash flow to compete for talent on salary, leaders may need the money for other aspects of the business. Equity compensation is a way to attract high-quality employees and help keep payroll manageable.

The good news for startups is that millennials are the most entrepreneurial generation and the most likely to identify equity compensation as a significant factor in choosing their employer. According to Schwab Stock Plan Services’ latest survey on equity compensation, 56% of millennial equity plan participants say equity compensation is a main reason or one of the main reasons for taking their current job, compared to 27% of older participants. (The survey was conducted in the summer of 2020 with 1,000 equity compensation participants between the ages of 18 and 75.)   

Whether you already offer equity compensation or are currently considering it, this research offers a few new insights that can help you attract and retain top workers.

Related: How Franchises Can (and Should) Attract Millennial and Gen Z Franchisees

Make millennials part of your growth story

Millennials are often comfortable with equity compensation and they are seeking more than a short-term bonus. More than 81% of millennials consider equity compensation to be important and reported that building wealth is one of the top reasons they value it (43%). According to the Schwab survey, 79% of millennials who responded said they were either extremely or very confident using equity compensation to reach their financial goals, compared to 65% among older generations.

The interest in long-term wealth building creates an opportunity to connect with employees by offering them a direct and tangible link to an organization’s evolution. The fact that the company’s success plays a key part in their own success is viewed as a strength of equity compensation by many millennials (30%), as is the ability to participate in company growth (41%).

Offer millennials choice

When it comes to equity compensation, satisfaction is in the details for millennials. Schwab’s survey found that 91% say it’s important for them to be able to choose the type of equity awards they receive. The most common types among the survey participants were the following: 

• Employee stock purchase plans allow employees to purchase company stock at a discounted price.
• Incentive stock options grant employees the right to purchase a certain amount of stock at a set price (strike price or exercise price) after a set amount of time (vesting period) and before an expiry date.
• Performance shares give employees a certain amount of company shares as part of their compensation if pre-agreed performance benchmarks are achieved by the company.
• Restricted stock units and awards are structured quite differently despite the similar names. Restricted stock units represent a promise made by a company to deliver company stock to an employee at a future date, under certain conditions such as a funding round. Restricted stock awards are more like options, granting employees stock which they can purchase, sometimes at a later date or after certain conditions are met.

Building flexibility and choice into your equity compensation plan could be the differentiator between you and the competition.

Related: How Millennials Are Changing Stock Investing

Provide more education

Most millennial employees (92%) want more education from their employers to help them understand their equity compensation programs. They prefer one-on-one advice in the areas where they want the most help, including developing a financial plan, balancing equity compensation with other investments, and planning for retirement. For employers, this means taking the time to get to know your employees’ needs and providing an option for personalized financial advice can be highly valued by millennial talent.

As many small and early-stage businesses are still coping with the effects of the pandemic, we are reminded that investing in people can help see a company through challenging times. Consider how equity compensation can help you build a team of people who will share your vision and build your culture to move the business forward.