5 strategies to fortify your stock plan and reassure participants during economic turbulence

From inflation to interest rate hikes, tariffs to currency fluctuations and global insecurity, economic turbulence is already here. Equity compensation is particularly vulnerable. When share prices drop options can go underwater. If your employees stop seeing the long-term value, the purpose of your plan can start to unravel. So the question is simple – is your equity plan built to weather the storm?

Jorge Martin, Head of J.P. Morgan Workplace Solutions for North America, emphasizes the importance of preparedness.

“It’s important for companies to monitor the economic landscape on an ongoing basis and look to make whatever moves are necessary, especially if entering a period of relative uncertainty,” he said.

He also stresses the importance of keeping your employees at the forefront of any plan of action.

“It’s essential that participants feel informed when the economic forecast is unclear. During these times effective communication and education becomes even more important. Of course you always want employees to understand their equity awards and how these can benefit them over time, but actively looking to facilitate that is vital when your people may be feeling anxious,” he said.

5 strategies to help maximize retention, preserve confidence and keep participants focused

Some of the approaches that Jorge Martin suggests companies can use at these times are as follows: 

1. Plan design:

Revisit your plan design. Is it advantageous to make adjustments with a more challenging environment in mind? Consider looking at:

• Grant frequency: Are your grants concentrated to one part of the year? Offering smaller grants staggered across the calendar can help to mitigate risks associated with changing market conditions.
• Performance conditions: Depending upon the circumstances, you might look at modifying any performance-based terms linked to your equity awards. At times of economic uncertainty performance conditions may be detrimental.

2. Participation rates and general perception:

Keep a close watch on quantifiable and qualitative factors and ideally try to preempt issues before they arise.

• Monitor participation: One of the key metrics on how any stock plan is performing is participation rate. “High participation at launch constitutes success, but there is no guarantee everyone will stay the course, particularly when you enter a period of economic turbulence,” Jorge said. It’s advisable to closely monitor participation, with a view towards detecting emerging trends, e.g., early exercising of options can suggest employees are questioning the company’s long-term prospects.
• Perform pulse checks: Conduct surveys, questionnaires and/or face-to-face meetings, to stay up to date on how participants are feeling about the plan, but also their understanding of it. This can help inform your ongoing communications strategy.
• Individual sentiment: People need to have confidence that participation in the stock plan will deliver for them over time. Generating this positive belief may be relatively easy in favorable market conditions but can take more effort when the backdrop is challenging. Again, the key to addressing this will be effective communications.

3. Financial wellness:

Depending upon the business and sector, it’s not unusual for plan participants to possess relatively limited financial knowledge. While this is never ideal, it can become particularly problematic in challenging times. Devoting resources to financial wellness programs designed to provide employees with the knowledge and skills to better understand and manage their financial life can prove worthwhile. Among the potential benefits are:

• Greater understanding of equity: Increased financial knowledge can help employees to have more appreciation of the potential benefits associated with equity compensation.
• Lower levels of finance-related stress: Individuals who feel more empowered in their financial life, are often more likely to focus on long-term goals and understand transient market fluctuations.
• Better decision-making: When people increase their financial literacy it can correlate with better decision-making on money matters across the board, including on equity plan participation.

4. Response to underwater options:

No company wants to see their stock options go underwater, i.e., when the exercise price exceeds the current market price, but having a clear response strategy in place in the event of that happening is important. Some options are:

• Reprice options: Cancel underwater options and replace them with options valued in line with the current market value.
• Exchange options: Exchange the affected options with another form of equity, e.g., restricted stock units (RSUs).
• Extend expiration: It may be possible to extend the expiration date. This would be done with a view towards giving company stock time to regain some or all of its previous value.

5. Communications:

In times of economic turmoil your messaging and communications may need to take a different focus.

• Transparency: “Be open and honest about how prevailing conditions may be impacting on the company and how you’re responding,” Jorge said. “Being seen to acknowledge the reality of the situation can enhance your credibility and inspire confidence.”
• Inform your participants: Providing employees with information about their stock plans can help to inspire confidence. You might consider creating internal Q&As, organizing webinars or workshops, hosting information sessions and/or ensuring that your equity compensation platform has a curated content section designed to build individual understanding.
• The long game: “Times change. Reminding your employees to focus on long-term goals rather than the market volatility of a given moment can often add clarity at times of uncertainty,” Jorge said.

“Remember, the point of the exercise is to assess and determine how it might be best to react to changing economic circumstances. The cyclical nature of events means that turbulent times will pass, but when facing economic headwinds, you need to do all you reasonably can to fortify your equity plan and reassure participants as you ride out the storm,” Jorge said.

What next?

At J.P. Morgan Workplace solutions we provide employee equity management solutions for businesses of all sizes the world over. You not only get the benefit of our all-in-one automated platform to handle the day-to-day administration, but you also get access to a robust team of equity specialists and support team who can work with you to develop an employee stock option plan designed to meet your needs.