A Complete Guide on Stock Incentive Plans

There are many traditional ways in which companies provide benefits to their employees to keep them happy.However, one unique benefit that many companies are now starting to use to motivate their employees is stock incentive plans. This is a reward style that encourages the employees to perform at their best because their own interests are at stake.If you are considering implementing a new reward system in your company and wondering if a stock incentive plan would help you out, then this guide is for you.

What Are Stock Incentive Plans

Also referred to as a stock option plan, this is a system of rewarding your employees that allows them to share ownership of your business against commendable performance. Typically, the share quantity is small if you look at a single installment which means one cannot get up and leave the company after you give them shares. The whole point is to keep them motivated and connected to your firm, so you keep on giving them more stocks every year. The amount of a single incentive may not be significant, but it can accumulate into a decent chunk of shares over the years.

Who Uses Stock Incentive Plans?

Given how effective this method of reward is in terms of making employees perform at their best, almost any company can implement it. If you are a business that deals with sensitive data or equipment, then this may not be for you. The most suitable scenario for using stock incentive plans is when you are creating a startup. Given the lack of funds available in the first few years, you want to attract top talent and retain them without going bankrupt yourself or losing them to someone else. Stock incentive plans can be a great motivation in that scenario and help you attract people who can take you to your success.

What Makes Stock Incentive Plans Successful

There are several different reasons why businesses would want to implement stock incentive plans when starting off. Here are a few things that you can see in almost any business that uses such a plan for its employees.

  • Increasing Stock Value: This is a cycle that benefits the business and the employee collectively and you can see why. Once the business issues stocks to the employees, it can also readjust the stock price to reflect its increased value after issuing the stocks. And employees who join when the company started could make millions of dollars for an extremely small investment. Imagine if you bought shares for Snapchat or Twitter when it started for a few hundred dollars. Those shares would probably be worth millions of dollars by now.
  • Cap Table Locking:For companies that create incentive plans when starting the company, there is a clear answer on what percentage of stock will be dedicated for that cause. This fixed value makes all future calculations extremely easy, and you can easily figure out what the new value of a stock will be after every new stock incentive that you give to prospective employees.
  • Talent Retention: This is the most obvious and the biggest benefit of introducing stock incentive plans. When an employee has ownership of a company‚Äôs shares, they will be bound to perform well because their own interest would be involved in profit. Additionally, to make their profit value big enough, they would need to stay with you for a long time, which will help you in many ways.

Conclusion

Every business these days is learning about stock incentive plans and trying to figure out how they can use them for their benefit. We recommend that you do the same for your business and you will undoubtedly see the benefits sooner than you imagine.