Rodney Bolden:
Today we're looking at an old topic in a new way. When it comes to attracting talent. It might still be easy to believe that it's only about securing the right person for the role and bringing them on board, but really that's just the beginning. The art of attracting and retaining employees can often involve workplace financial benefits. Lately that's included some form of performancebased rewards, including the topic of today's conversation, equity compensation.
Luckily, I'm sitting here with Dee Crosby, a vice president in the learning and development team at Morgan Stanley at Work. Dee, I know that equity compensation is typically handled by stock plan administrators, but our audience also includes HR leads and plan sponsors who may or may not be familiar with equity compensation. Can you give us an equity 101 tutorial on what is equity compensation?
Dee Crosby:
I would be happy to. I think everyone's familiar with the word compensation. It's what you expect to get for doing some work, right? I do X, I get Y. Most people view that as a paycheck. Perhaps, it's part of healthcare benefits or something else when you work for an employer. But wouldn't it be nice if part of your compensation was actually getting a piece of the company… getting some ownership stake in the company that you're working for? That's what we mean by equity compensation.
So in return for working for this company, not only do you get your paycheck, and perhaps other types of benefits, but in a lot of cases you get on top of that stock ownership in the company. Isn't that a fantastic thing? It's like instead of just working at the candy shop, you get to own a piece of the candy shop. It's the idea of getting the employees to be excited about the success of the company and having them benefit when the company is more successful. So in effect, they are truly shareholders with that same goals in mind. So from a 1 0 1 perspective, that's what we mean by equity compensation.
Rodney Bolden:
Okay. Now I have to say, all I can think about is chocolate right now with the candy shop analogy, but-
Dee Crosby:
You and me both. Okay.
Rodney Bolden:
... it did absolutely hit it home for me. When thinking about workplace financial benefits, there are a number of different types of workplace financial benefits. What is the value to the employee of equity compensation versus other workplace financial benefits?
Dee Crosby:
Equity compensation is a way to have an investment in your company. So in effect, it's a long term kind of view. "I want to stay with this company because I want to make it grow. I want to do these things." When I think of the other type of benefits from a company, I don't see that same alignment with the goals of the company that makes it different. Keep in mind, like a candy shop, equity compensation comes in different flavors. So you're not just going to get chocolate. We can also have hard candy and we can have lollipops, and we can have all different kinds of things. So using that analogy, when you look at a company, perhaps your top executives are getting perhaps the bulk of their compensation in equity, in stock, and they're probably just getting either stock options, which is the ability to buy stock at a set price, or they're getting restricted stock grants, just giving them shares of stock at a certain point in time.
That may trickle down to certain levels within the organization, and you might get your upper management getting those restricted stock grants. Maybe there are a handful of companies. I won't say a handful, but in that 50 percent-ish range that will grant their employees perhaps a one-time grant when they are hired, and they get, let's say, a restricted stock grant. "So I'm not paying for anything, but if I stay with the company another three years, I will own this share of stock."
That's good. That might be a one-time deal. But we have a different flavor that's called an employee stock purchase plan. The employee stock purchase plan flavor is where a company allows their employees to purchase stock at some type of discount.
Some of these plans are getting quite creative in the types of discounts that they're offering. It may not just be, "Oh, oh, we'll give you a 10% discount on the stock price." Sometimes it's share matching programs, which are really neat, where the employee might buy three shares of stock and the company goes, "Great, you buy three and I'll give you two more." So it's a great way for a whole bunch of employees to be able to have that ownership mentality and to benefit from the growth in the company. So all of these are tied to the long term success of the company and the company's stock price. So I see that as the differentiating factor between equity compensation benefits versus other types of benefits that a company may offer.
Rodney Bolden:
You mentioned a lot of different ways companies are going about issuing equity compensation. Are you seeing any other trends, especially in recent years with everything that's going on in our world and in our environment and in the workplace?
Dee Crosby:
Yes, I've seen quite a few, and these are buzzwords that you've heard. I'm sure you hear the term ESG, on the news all the time. ESG is environmental, social and governance. I think recently in the news you see a lot of press about the pay ratio of CEOs to the normal folk at a company. The gap seems to be growing more and more where the CEO pay could be three or 400 times or more of the average person's pay.
So companies are taking a look at that, and I know the millennials and all the others are saying, "That doesn't seem fair. How come the big players get to make a lot more money and we don't?" So there's a lot of push for companies to be more equitable, especially in those underrepresented areas. We know that people of color and women don't necessarily have as many spots in those high upper management roles at companies. So they're not getting those equity compensation benefits that those are.
So companies are taking a look at that and we're seeing more companies either offer equity to more people, equity compensation, or we see a lot more folks offering an ESPP: employee stock purchase plan allowing a lot more folks to participate. But I have a caveat there. So let's say I have an employee stock purchase plan that allows a person to contribute up to 15% of their income to buy stock. Well, if I'm the CEO and I'm making a couple million dollars a year, I'm not going to miss 15%. I'm going to buy the stock and everything's going to be fine. But if I'm the person living paycheck to paycheck, it's going to be hard for me to contribute to that plan because most plans have a purchase period of anywhere from three to six months.
So that means 15% of my pay is being taken out every paycheck, but I'm not going to see the stock for three to six months. I'm going to be out of pocket without money, and that's hard for somebody who's living paycheck to paycheck. So we're starting to see companies recognize that and try to find ways to make it easier for folks to be able to participate without being penalized in that manner. One of the great ways that you can do that is this idea of a cashless ESPP. It's the new buzz out in the industry. It's a way for a person to participate and not really be out of pocket for that long.
The other trend I'm seeing is the idea of fractional shares. Now this is going to blow your mind. So in the old days, several years ago, everything that you did with equity compensation was in whole shares. So if I'm going to give you a grant of stock, it's in whole shares. If I'm going to do an ESPP, you can only buy a whole share. Well, think about, again, we'll go back to that average person. Let's say I'm okay with being out of pocket, without money, but what if the share price is like $700 a share? Well, I might be able to buy one share if I'm lucky, that doesn't seem very equitable. So the idea now is whatever you contribute, you could buy just a fraction of a share. So maybe you contribute enough to buy one and a half shares or 0.75 of a share.
So it's again, that idea that you can be more inclusive of everyone of the company to be able to be that owner of those shares and not be so punitive for the folks who may not be able to have a $700 stock price. I can't actually afford that. So that's exciting because that's truly a way of opening the door to have more people participate. So I'd say those two trends, the cashless ESPP and fractional share purchases, are two of the trends that I've seen, especially in the last two years that have come to light.
Rodney Bolden:
It's fascinating that they've come to light because a lot of companies are talking about how do you address the needs of different parts of the workforce and wealth building and wealth inequality in this country. So I find it fascinating that it's having that impact on companies where they're being creative in how to address that through equity compensation.
But I think about the line from Robert Burns, his poem To a Mouse, which also John Steinbeck used. Now I'm going to paraphrase it for this purpose. "The best laid plans of stock plan admins don't always go as expected sometimes." So can you talk about what are some of those internal roadblocks that stock plan admins face when it comes to implementing an equity compensation program?
Dee Crosby:
The biggest two barriers to a successful program, education and communication, those are it. We opened with not everyone understands what equity compensation is, and that's not just true from our audience here, but it's true at a company. There are people who do not understand the value or understand how it can benefit them. So I'll give you a great example. A company implemented a great program, which was to give every person an annual grant. So it was a great way of retaining employees. You know that if you stick around another year, you're going to get X number of shares, and it was great deal. So they were happy about that and they thought that the best way to do this was to have the managers actually give the awards out to their employees. That was great. They thought, "Ah, this is awesome, right, no problem." And that's all they did.
So the day that they were supposed to hand out the awards, there were a lot of managers who waited until five o'clock until every single person had left and they walked around. Now, this was a few years ago, because they're still on paper, pieces of paper for the awards. So they walked around and put it on everybody's desk. So imagine you coming to work on Monday morning and there's a letter on your desk saying, you got this thing and nobody there to explain it to you. Are you going to appreciate that? Are you going to understand it? No. I think that's a huge thing.
So the communication plan was poor, but so was the education. This company didn't bother to educate the managers who in turn then couldn't educate the employees about the value of this award. I think it's especially confusing for employee stock purchase plans because, as I mentioned, a lot of this is through payroll deduction. So you've got employees who already have a lot of things being deducted out of their paycheck. They probably have payments for some healthcare and hopefully they're doing some 401K type savings." So now you try to talk about, "We've got this great new employee stock purchase plan and it's going to help you and all you have to do is sign up."
A company needs to explain to it employees how it works and how that extra deduction out of their check and that short term will lead to a long term goal. Without that, all the employee is going to see is, "Somebody wants to take more money out of my check and I don't know how that's going to benefit me." Equity compensation hits the bottom line of a company. It's an expense. So why won't they, don't they make a better effort at educating their employees about the benefit? That expertise may not reside in your human resources department or in your stock plan department. So having an additional resource to go to and provide that educational element is super critical to success.
Rodney Bolden:
What are some strategies or best practices you've seen to get employees engaged and taking advantage and utilizing equity compensation to reach their long-term financial goals?
Dee Crosby:
Well, I'll give you a great example of a company that had rolled out an employee stock purchase plan and they had abysmal participation rate. I'll just be honest, the participation rate was around 20%, and they couldn't understand why, because it was a great plan. Well, it turns out that no one had rolled out a real education plan around this new ESPP. They had put up some posters, I'm going back a few years, but they had put up some posters. They thought they had explained it really well. What they ended up doing was they said, this isn't working. Let's find out why.
They used a survey tool and went out to their base and they had a lot of employees, this was a large company, so they just threw out a survey saying, "Okay, A, did you know we had this plan B, are you participating? C, if you're not participating, why not?" They gathered this information and overwhelmingly what came back was the fact that they knew about it. They had seen the posters. They'd seen the flyers. They weren't participating. The main reason was they said, "I don't understand why this would benefit me. I don't understand why this is going to be good for me. I'm fine doing my 401k. I don't need this."
So that was their aha moment, right? To say, "We've done a poor job explaining what the actual benefit of this plan is." You can talk about the intrinsic value of that feeling of ownership, right? In a company, that's what I started with. I'm going to get excited about working for a company because I'm a shareholder. In reality that's true. But at the end of the day, if you're trying to talk to somebody who's living paycheck to paycheck or struggling to make ends meet, or maybe they're, as I said, putting money in a college fund, putting money in their 401k, paying down a mortgage, maybe they're paying down student debt, why in the world would they want another deduction out of their pay?
So the company went back and re-rolled out the plan with examples. They created personas of people and said, "Here's a sample person who is, let's say, young in their 20s or 30s without kids, and this is their goals." They showed goals with and without the ESPP, and then they took it, "Here's somebody with a bunch of kids saving for this and this, and here's how the ESPP could help them and somebody getting close to retirement." So they made it real for the people. Instead of just numbers and charts, they made it real so that then they go, "Oh, that's me. That's my situation. I never thought that participating in this plan would help me achieve that college savings. I didn't realize this plan could help me pay down my student debt." A year later, that 20% rate had moved above 60%. So by getting back in touch with the needs of their employees, they were able to demonstrate those benefits and really make it successful.
Rodney Bolden:
I want to go back to something you said pretty much at the top about equity compensation as a retention tool. Talent retention is very much on the mind of HR leads, plan sponsors, and even stock plan admins these days. What is the value of equity compensation as a talent retention tool, and how do you go about making sure that it is an effective talent retention tool?
Dee Crosby:
In my mind, it's a great retention tool. The most common vest period, according to latest surveys I've seen is three years. So perhaps, you have to stay with the company for those three years to earn that type of award. If you give an award like that every year, you're giving a person that runway. Each year something is going to vast, and I get more the next year and I get more the next year and more the next year. It doesn't have to be a huge grant, but to know that if the company's still doing well and I'm still performing well in my job, that I'm going to get this additional equity.
Again, that idea of, "Hmm, company's successful, I'm successful," and it keeps going and growing. I think it's important from the stock plan administrator point of view, is to give a person, their participants, that view of what does it look like today, what your equity is, and what will it look like a year from now and two years from now, and three years from now based on those grants vesting. So you need to have a way of illustrating that to show the value over time will be a great retention tool because it's not just about the salary. You got to give them a reason to stick around, and some of that is that continual vesting, right? That earning over time.
Rodney Bolden:
Dee, such incredible insights. I take away from today the importance of education, communication, advice and guidance that's going to lead to comprehension as to the value of equity compensation for my situation as an employee, and also making me invested long-term in that company. My success is tied to their success and vice versa. That potentially can make me more committed to staying. Thank you for your perspectives, your anecdotes. I have one final question for you. What makes you invested at work?
Dee Crosby:
I am so lucky to work for this company, Morgan Stanley at Work, because I feel... It's going to sound corny, but I really feel like they're invested in me. I mean, we were just talking about all these things that are available for our clients, the access to financial wellness resources, financial advisors that we can offer. Well, Morgan Stanley at Work puts their money where their mouth is and they give that to us, our employees as well. So I'm really excited about that, that I feel that they do a great job at their education and communication and I'm totally invested with that. I love it.
Rodney Bolden:
Great. Dee, thank you so much for your time today. Great discussion.
Dee Crosby:
Well thank you. I've enjoyed it.
