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Retention Hook HR

…So many companies have a tendency to use equity as a retention hook primarily to keep their senior management / executives.

Restricting large equity payouts to this population (senior management) somewhat makes sense because an organization doesn’t want to dilute its equity by spreading it across too large a percentage of its work-force.

With that said, I am becoming somewhat bullish on using deferred compensation as a retention tool in non-executive populations. My reasoning here is basically three fold.

1. If given in the form of back loaded RSUs or (preferably) PSUs/PEUs vesting out over, say, a 3-5 year period then:

a. Your employees becomes much more expensive to poach (any company looking to take them is either going to have to offer a similar equity package or else a very large sign-on upfront)

b. The equity pays out as your employees become more tenured with the organization and (if the shares are performance based) add more value.

2. There are also some very good time value of money reasons to give your employees equity payouts as well. Even after controlling for the marginal propensity to consume (which states that as you make more money you spend more money), if you give your employees equity earlier in their careers they will (theoretically) start to invest earlier. Using the formula for compound interest:

Compound Interest

…we can very easily show the time value of money here. As an example, below is a comparison of how much money accumulates using identical investment vehicles over two different periods (say, five versus ten years in accounts gaining 8% interest compounded quarterly):

Example Compounding Interest

^^^which in this case would be about 1.5 times more in the ten year versus five year account. I wrote an article a while back that illustrates how compounding interest works much more simply for anyone whose eyes glazed over reading the above, but regardless the point here is that if you put your employees in a position where they can start saving earlier it will pay dividends 1. I suppose that objectively an employer could have a really aggressive 401k match (7.5% or something) to accomplish this same thing without diluting equity, but people tend to take more happiness from their earnings when they invests in experiences. Ergo, you want your employees to spend some of the money they earn.far exceeding the amounts you pay out. 1

3. …And to the 2nd point, once you take money off the table work becomes more about intrinsic reward. Over time, this not only shapes your workforce to be made up of employees that really want to be there, but it also forces managers to be more engaged with talent to keep them. I understand that many jobs are boring, but I feel like that’s an infrastructure problem in many instances. There are lots of ways to make work more fun, and putting pressure on an organization to think about ways to do so is going to ultimately build a more engaged workforce.

Closing here, the amount of equity you want to grant (and how far you spread it across your organization) is going to vary considerably by your industry, your workforce makeup, and – frankly speaking – how much you can afford to pay out. A friend and I were talking about this topic the other day and he mentioned that generous equity payouts might be possible if a firm has an aggressive share buyback policy. That isn’t my area of subject matter expertise, however, so before I start to ramble I’m going to close here.

How generous is your company with its equity? Should it be more generous?

As always, please share your thoughts in the comments section below.

Best,

Rory

If you have questions about something you’ve read here (or simply want to connect) you can reach me at any of the following addresses: 

SomethingDifferentHR@gmail.com OR rorytrotter86@gmail.com

@RoryCTrotterJr

http://www.linkedin.com/in/roryctrotterjr

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