Employee Compensation: Stock Option Plans and Beyond

Any size or type of organization may have reasons for considering a compensation plan which goes beyond salary or hourly wages to reward or incent their workers.  Before investing in a particular plan or program, it is imperative to give careful consideration to what the organization hopes to accomplish through the incentive plan and structure.  Considerations should include what your workers value, what standards exist in your industry and what the company stands to gain and compromise through the plan.

Incentive options include:

  • Commissions and cash bonus;
  • Profit sharing;
  • Equity in the company;
  • Other forms of employee incentives

CAUTION: All compensation plans should consider termination of employment and what, if any, compensation continues through the notice period and what happens to company equity and unexercised options upon termination

Commissions and Cash Bonuses

The most direct form of additional compensation and perhaps the easiest to implement, comes in the form of cash payments to workers.  For those workers who have direct sales or account obligations, commission plans are an obvious and direct incentive.  Bonus plans can be discretionary or fixed according to particular personal or company performance matrix These types of incentives can be highly personalized and can be either incorporated directly into employment contracts or can be implemented in company-wide plans.

    • Commissions and bonus plans are the most specific way to reward measurable worker accomplishments
    • Commissions and bonus plans both reward past performance and incent future performance
    • Workers who do not contribute directly to sales or account objectives can still be rewarded for their contribution to overall company performance through discretionary bonus plans

Profit Sharing

Formal company profit sharing plans can help employees identify with the overall success of the company, and help them see beyond their particular role or business unit. Before implementing such a plan, a company should consider how they will measure profitability for the purposes of the plan and then ensure that they are currently profitable and will likely stay profitable for the following few years.

Implementing a profit sharing plan in a year where company profits are best utilized as reinvestments in the company or in growing the company workforce can be counter productive.  Similarly, implementing a profit sharing plan when a company is not yet profitable in the hopes that the plan will provide the incentive for employees to bring the company to profitability can end up being a disincentive for employees to stay with the company if factors outside of employee control repress profits.

Profit sharing plans should be introduced into a workforce where employees have a clear understanding of how they can contribute to the success and profitability of the company and where there are routes for employees to provide suggestions to management which can aid in company productivity and growth.  Companies should regularly communicate profitability successes and challenges and help employees understand how those factors effect the profit sharing plan.

Profit sharing plans can be in the form of deferred profit sharing, which forms a retirement benefit or, increasingly, as an immediate cash payment to workers.  When drafting a profit sharing plan a company has to place that plan in the context of the balance of the compensation planning throughout the company and also in the context of retaining value in the company for shareholders. Companies may decide to set a particular revenue or profit target before the profit sharing is triggered. Companies also need to consider which employees or level of employees are eligible to participate in the profit sharing plan.  Profits can be distributed annually or on a more frequent basis such as quarterly, depending upon the company revenue stream.  All profit sharing plans should address what happens when a worker leaves the company before a particular payout period.

    • Profit sharing is a powerful tool to incent and enable employees to participate in the profit making goals of the company
    • Care should be taken in the timing of the introduction of such a plan
    • The success of a plan depends upon the active and ongoing communication to employees of the factors which influence profitability


One of the most popular methods to enable worker participation in the profit and growth of a company is through the provision of equity in the employer. Before launching an employee stock option plan or other plan to share in equity, a company should consider carefully the reasons for sharing the ownership of the company and the long term implications.

It is important to consider how value is obtained from share ownership: value comes only through the sharing of the profit of a company with shareholders through dividends and through a growth in the value of the shares between acquisition and the sale of those shares.  For a start up company whose goal is the eventual sale of the company, stock in a company can be a powerful and effective incentive for employees to work towards the building of value in the company for it’s sale.  For a company which is already publicly traded or who is seeking to go public, stock is also a good incentive.

However, for a closely held company which intends to continue operating as a closely held company in the long term and whose value is generally in it’s continued performance of contracts (e.g. a services company) and which does not regularly extract company value through dividends to shareholders, regularly turning over company equity to employees may not be the best incentive.  Employees in such companies may develop a sense to loyalty to the company through that ownership, however they are unlikely to derive much value from that share ownership.

If employee stock ownership is the right incentive to offer employees of a company, that equity can be delivered in straight stock grants (often done by start up companies to attract talent to the team) or through various forms of stock purchase and option plans.  In designing the right plan for a company, consideration has to be given to the overall pool of equity available for employee share ownership, the terms of the option grant and vesting schedule and what will happen to the shares when employment comes to an end.

Privately held companies should consider having a special class of shares for employee ownership which have share attributes which meet the incentive goals of the plan. That employee class of shares could be provided the right to elect a member to the Board of Directors of the company to enable employee participation in the management of the company.  There should be a shareholder agreement in place which addresses issues such as the sale of the company and issuance of additional stock.

There are numerous variations on equity plans, including restricted stock, restricted stock units, phantom stock units: the variation only seems to grow.  Choosing the right plan with the correct parameters is key to ensuring that the incentive goal is achieved while at the same time the company has not exposed it’s ownership structure in a way which compromises future corporate decision making.

    • Providing employees with ownership in a company can be a way to balance lower cash compensation
    • Equity plans can incent not only performance but also loyalty to the company through vesting periods
    • Great care should be taken to choose the right equity plan for the long term interests of the company

Other Ways to Provide Employee Rewards

Organizations should not forget that there are a multitude of other ways to provide incentives to employees.  Understanding what your workers value should be your first step in structuring the right incentive plans.  Employees may be motivated by an ability to earn additional paid time off, they may be motivated by non-financial recognition of their successes within the company, they may be motivated by being provided with time to work on their own projects within the company or even community work which is important to them.

Motivating the behaviour you need and want from your organization’s workers should be an ongoing effort which is continually assessed and revised as both company and sector environments change.

How Momentum Can Help

Contact us today to request a review of your current incentive programs. Let us help you come up with the best plans in order to achieve your organization’s objectives.