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Stocking Up on Motivation
A recent survey finds that seven in 10 employers are using stock to motivate their employees -- and about half of them are issuing such equity to workers at the manager level. Potential problems with the practice, however, include possible dilution of the stock as well as the challenge of employee education.
Despite the negative vibes emanating from Wall Street during the recent economic downturn, employers continue to reward and -- hopefully -- motivate their workforces with stock. Even workers at or below manager level can benefit from this "stock as motivator" strategy. Yet, according to a recent Charles Schwab survey of 200 stock plan "decision-makers," employee knowledge about the benefits of equity plans needs much improvement. "This is the first study that we have done on the issue, so we can't say the use of equity is on the rise, but the majority [71 percent] of the public companies we surveyed said they were increasing stock rewards despite the economic downturn," says Larry Bohrer, Stock Plan Services vice president at San Francisco-based Charles Schwab. Bohrer adds that Schwab clients, who can be viewed as a proxy for the marketplace, are saying they want to increase equity compensation for employees well below the level of management as a way to recognize people for company performance. These benefits are not just for senior-level employees, as half of the respondents now offer performance shares to manager-level employees, with 48 percent offering manager-level employees stock options and 34 percent awarding restricted stock to managers. The Schwab study, conducted online this fall, surveyed primarily executives (79 percent) at U.S.-based companies that typically have about $1 billion in annual revenue and average more than 30,000 employees. "Most of our respondents look at giving stock as special one-time rewards, rather than ongoing compensation," Bohrer says. "They like the idea of using equity compensation as a tool to motivate their workforce." Peter Oppermann, worldwide partner in the Human Capital Practice at New York-based Mercer, says he was surprised by the percentage of companies offering performance shares below the manager level. "What we have seen and recommend is you don't grant performance shares to managers or lower, but focus more on restricted shares," Oppermann says. "Restricted shares will encourage managers to stay with a company until those shares vest." Oppermann says that, while companies certainly have not stopped granting stock, they have to be careful because at some point an employer can't continue to give out shares to employees due to dilution -- the fear that issuing additional shares of company stock will dilute the value of the overall share price. "Stock is still used as an incentive for employees in various forms," he says, adding that most organizations he works with are focused on restricted stock with less senior people. "Restricted stock helps retain talented people and gives value to staying with the company." Ed Rataj, a certified compensation professional and managing director of compensation consulting at CBIZ Human Capital Services in St. Louis, says he also is a bit surprised the Schwab survey found such high interest in providing stock awards for those below manager level. "We are seeing in the market a desire by employers to offer stock, but there are some stumbling blocks," Rataj says. For example, Rataj says, administrative costs for stock plans can be high, so employers need to weigh the upside vs. the costs. Second, he echoes Oppermann's caveat that rewarding too many employees with equity can result in dilution. "As I talk to clients, a lot of CEOs out there say they want to do this because they need to align employees with shareholder values," Rataj says. "But they have to be very judicious or it will not really be a benefit to the employee or the company itself, depending on how he stock is awarded." He cites the risk of giving out stock options that eventually could prove to be worthless, for example. "If options turn out to be worthless, the employee perception is that the plan is a negative and was oversold," he says. The Schwab survey also found that one in four respondents (25 percent) said their company plans to increase stock-plan benefits in the next year, while two-thirds (68 percent) planned to maintain benefits at the current level. It also found that more than one-quarter offered performance shares (26 percent) and/or stock options (27 percent) to employees below the manager level, while 17 percent awarded restricted stock to this group of employees. Respondents say their equity plans are targeted more toward existing employees than recruits, with motivating employees to support the success of their company (65 percent) and offering employees a sense of ownership in the company (58 percent) given as the most commonly cited reasons for these benefits. In terms of how employers use stock to reward their workers, the most common offering is stock options (71 percent), which are options to purchase company stock at a specified price. Next is restricted stock (64 percent), stock issued to employees that typically vests over a period of time, and finally, performance shares (51 percent), stock issued to employees based on corporate performance. According to the Schwab survey, the main hurdle for stock plans is education. The survey found that respondents gave relatively low grades to both executive and non-executive employees on their understanding of the overall stock-plan benefit. For HR executives who are largely responsible for communicating to employees, Bohrer says, it should be noteworthy that a significant number of employees do not fully understand (and possibly don't appreciate) the benefit being offered to them. Nearly half of survey respondents (48 percent) consider educating employees about the features and benefits of their stock plan a "significant challenge." But, on the flip side, they say they are poised to take on the challenge, with 78 percent saying that educating employees on the stock-plan value and benefits will be an important focus for their company during the next two years. In fact, the survey found that employers have already begun to deploy a variety of educational activities to increase employee knowledge of the benefits and workings of their company-stock plan, such as including information in new-hire benefits information packets (64 percent), providing information on the employee Web site (63 percent), including stock-plan information details in any discussions of overall employee-benefits packages (59 percent) and scheduling one-on-one employee consultations with stock-plan providers (25 percent). Bohrer says the face-to-face effort may be the lowest at 25 percent, but it is probably the most important. "The static things -- packets, Web site information -- are good," he says. "But employers are not doing nearly as much as they can in taking action, by holding seminars or scheduling meetings on stock plans. "Because equity plans are more complex than traditional compensation programs, they require a more robust educational effort, and HR can lead that effort," Bohrer says. "Employers who take steps to increase understanding of these plans across their employee base -- whatever type of plan they offer -- will be more likely to reap the rewards of a more motivated and engaged workforce."
December 2, 2009 Copyright 2009© LRP Publications |
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