As the old saying goes, the definition of insanity is doing the same thing over and over again, yet expecting a different outcome each time. When it comes to operating a successful business this is especially true since you need to recognise which practices aren’t working and where things need to change to improve outcomes – they’re not going to happen by themselves.
Take your employee equity compensation or share plan for example. The positive outcomes that can arise from operating such a scheme are well known, from helping to attract high quality staff, to promoting loyalty and also encouraging staff retention. However, if you’re not seeing these benefits then it might be time to take a look at your current offering and see if it needs to be tweaked, with one possible solution being to amend the vesting period.
At J.P. Morgan Workplace Solutions, we work with companies every day on their employee equity solutions. So, whether you are an existing customer, have an employee equity plan with another supplier but feel it isn’t meeting your needs or are yet to introduce a scheme to your company, you can reach out and speak to our team of experienced personnel.
What does a vesting schedule do?
A vesting schedule is the process by which an employee earns the right to their shares or stock options over time. Normally employees forfeit their unvested portion of assets if they leave before the set time has elapsed or if the target isn’t achieved.
Milestone-based:
A method whereby benefits are granted based on the achievement or performance of certain targets, either personal, e.g. sales goals, or companywide, e.g. an acquisition or IPO.
Time-based:
A percentage of stock options are earned over time. When the first option is granted this is the cliff, and the rest of the options are granted monthly, quarterly or annually, in line with a set vesting schedule, e.g. 25% in year 3 and year 4 and the remaining 50% in year 5.
Hybrid:
A combination of the above. Employees are only eligible to exercise stock options after staying in the company for a minimum predetermined period, while also attaining a particular objective.
Accelerated Vesting:
A company might choose however, as an incentive, to shorten the vesting period to allow employees to gain access to their restricted company stocks or stock options more quickly. This is known as accelerated vesting since it is typically faster than the initial or standard vesting schedule.
Adapt and evolve
While there will always be some level of employee attrition, the advantages of employee equity compensation plans are well documented. They not only show staff they are appreciated, but can encourage them to buy into your company’s mission and culture, while ideally ultimately helping with the retention of world-class talent. Traditionally share plans had vesting periods of 3 to 5 years plus, the rationale being a reluctance to forfeit the pay-out would encourage staff to stay. However, as the average tenure has lowered you might be seeing high turnover regardless, like in the tech industry where the current average length of service is 3.5 years.
What we are seeing now is companies adapting and evolving with the times. There appears to be a trend among some tech companies of speeding up share vesting, thereby enabling employees to access equity holdings much earlier. This is similar to how companies who previously only offered pay-increases at set times each year are now accommodating out-of-cycle increases to combat the out-flow of staff.
Accelerated vesting – A modern trend?
More companies, particularly in the tech sector, began to look at accelerated vesting as a viable course of action during the pandemic years. Since then the idea has continued to make its way into the mainstream, with some high profile companies embracing the approach as part of their broader retention strategy.
Kindred Group plc recently worked with J.P. Morgan Workplace Solutions to set up a share plan with a 2 year vesting period where every permanent employee, outside of the executive management team, regardless of location, gets the same amount. As part of this unique approach employees are granted awards every year and by doing so, Kindred are hoping to avoid an event where the scheme ends and attrition could potentially spike. By granting annual awards they ensure that staff will always have a percentage holding yet to vest. This approach won Kindred the ESOP Star 2021 award and the ‘Most Innovative and Creative Plan Design’ at the 2022 Global Equity Organization (GEO) Awards.
Find out more
At J.P Morgan Workplace Solutions we understand not only the power of employee ownership, but the importance of doing all you can to ensure that your plan will help you achieve the desired outcomes.
No matter what stage you are at in your company’s lifecycle we can help you to address your employee equity solution needs. We work with companies across the globe each day to manage their share plan requirements. Remember, not all jurisdictions will have the same compliance rules in place, so it’s essential that you seek professional support. As part of our service Workplace Solutions has a team of specialists who can speak with you about the intricacies specific to different parts of the world.
This publication contains general information only and J.P. Morgan Workplace Solutions is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. J.P. Morgan Workplace Solutions’ Insights is not a substitute for professional advice and should not be used as such. J.P. Morgan Workplace Solutions does not assume any liability for reliance on the information provided herein.
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This publication contains general information only and J.P. Morgan Workplace Solutions is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. J.P. Morgan Workplace Solutions’ Insights is not a substitute for professional advice and should not be used as such. J.P. Morgan Workplace Solutions does not assume any liability for reliance on the information provided herein.
