Recruit and Retain with Stock-Based Compensation

As the unemployment rate declines and the labor market tightens, attracting and keeping talented staff members is becoming a serious issue. It’s particularly problematic for smaller businesses or those located outside of major metropolitan areas. We’ve noticed fierce competition for key talent in the industries we serve, as well as in our own industry, and I’d like to suggest a strategy for recruiting and retaining effective employees without a substantial outlay of cash – stock-based compensation.

Non-cash compensation, specifically stock options and restricted stock awards, can help level the playing field when you’re competing against larger firms, and, as the name implies, they don’t require massive cash outlays. Including non-cash compensation in your offers can dramatically improve the results of your recruiting program.

Your potential new hires are interviewing with expectations for a certain level of benefits and compensation. Talented prospects are often comparing offers from several firms, and will make their decisions, in part, on financial rewards. Options and stock awards, offering the potential to pay handsomely down the road, can help sweeten your offers, making them as attractive as bids by larger firms or firms located in larger markets.

After the hire, stock options and awards can help you retain employees and recognize the contributions of current employees. Ownership in the company helps create loyalty and a stronger commitment to its success. After all, people tend to be more invested when they own a share of the business.

Of course, there are financial implications for compensating employees with stock options and awards. My HORNE colleague, Josh Edwards, has written a great article detailing different types of non-cash compensation and their impact on company financials from both a book and tax perspective. If you’d like to learn more about the subject, I suggest that you start with their article.

Stock-based compensation can provide benefits to both employees and companies, but it isn’t necessarily for every business. Current owners may have questions about how such compensation will affect their ownership in the company, and management may have questions about the complexity of such a program.

Existing owners often have initial reservations about giving up any equity in the company, and they have a point. The stock that you offer to employees has to come from existing equity in the company, reducing the holdings of current owners. The flip side of the equation, however, is that the company needs to hire the best employees it can in order to grow and increase its value. Increasing its value will ultimately benefit all shareholders – new and old. Losing the best talent to competitors will weaken the company and its value over time. In this case, giving a little to gain a lot may be a winning strategy for current owners.

The complexity of stock plans is another concern businesses face. Determining the best plan, as well as understanding its tax implications and administering it can be daunting. Fortunately, you don’t have to start from scratch. Firms such as HORNE can help you make crucial decisions, provide insight into the technical details and help you avoid potential pitfalls along the way. If you’re losing great employees to the competition, stock-based compensation might be the strategy you need to win.

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