How Do Stock Incentive Plans Work?

Some employers give their workers the ability to buy company stock with lesser tax boundaries and more in-built discounts. This ability is usually presented in this form of a is a Stock Incentive Plan (though it can be called other names). Most of the companies using it are startup businesses seeking opportunities for investment capital. Because of the lack of investment in the initial stages, a lot of startups prefer offering stocks to their employees or outside stakeholders.

A Stock Incentive Plan is a process of issuing equity to the employees and consultants in a startup business. These plans must be granted in the form of legal documents, and must be approved by all the board members and co-founders of the company before it can be offered. 

Types of Stock Incentive Plans:

Stock incentive plans are usually offered to the top-tier management and prospective employees showcasing talent. There are different types of incentive plans that depend on several factors, such as the strength of employees in the company, the total budget, and the number of shares allocated for dilution. Some types of stock incentive plans are:

  • Phantom Stock Option Plans
  • Non-Qualified Stock Option Plans
  • Qualified Incentive Stock Option Plans
  • Profit-Sharing Plans

 Key Aspects That Make Stock Incentive Plans Work:

1)   Granting:

The grant contains all the information regarding the plan. It includes all the data regarding the type of plan you get, the securities you get alongside it, and the shares you get to exercise. It is an approved offer letter from the company, mentioning all the details regarding the plan. 

2)   Vesting:

The process of earning the right to exercise your options is called vesting. Stock incentive plans usually contain a vesting schedule that must be satisfied before the employee can exercise the incentives. It is a fixed waiting period that restricts the employees from exercising their options. There are various types of vesting periods:

  • Time-based Vesting
  • Performance-based Vesting
  • Time-accelerated Vesting

 3)   Schedule:

Stock incentive plans begin on a specified date that is mentioned during the granting. This is known as the grant date. After the exercise date has arrived, employees are free to exercise their options. They can either sell the stocks or wait longer for the market to rise. It depends on them. They are no longer bound by the company.

 4)   Strike Price:

The strike price is the worth of the stocks you’re buying. This worth is usually determined according to fair market value. And is determined before the granting is done. It is the cost the employees have paid to purchase the shares. It remains the same throughout the whole stock incentive plan.

 Benefits of Stock Incentive Plans

A stock incentive plan can really help your startup business grow. Without someone noticing, it brings extra value to your company from morale to increasing awareness of products and/or services. When people have a vested interest, they promote to their friends, families, and associates. If you know anything about business, you know word-of-mouth can equal revenue.  

Here are some benefits of granting stock incentive plans to your employees:

  1. Attract New Hires

Stock incentives help to hire new and talented employees for your startup. At the initial stage of your business, you will find yourself without any huge investment or seed funding. So, paying everyone full-time becomes a problem. Here’s when stock incentive plans become a huge asset to your business. They provide opportunities and returns to the newly hired employees and encourage more people to join your company.

  1. Keep Talented Employees

Offering meaningful stock packages to your high-end employees can make them love their job and keep them satisfied. In this way, they would be bound with your firm in the long-term and wouldn’t be able to leave you midway (depending on the way the contract is written to gain stock in the company). This can help you retain your talented and hardworking employees for a loner duration of time..

  1. Increase Loyalty & Dedication

When you keep your employees satisfied and happy, they give you more productivity. By offering a stock incentive plan to your top-tier employees, you can help converge everyone’s interest. They would know that they also have their share in the business, and this would make them work with more loyalty and dedication. This is quite helpful in aligning the interests of your company. It is win, win!

  1. Create a Cost-Effective Strategy

Every time you sell a stock to someone outside, you will have to come up with complete background checks and tiring legal procedures. You will also have to pay the taxes assigned by the state on the transfer of the stocks. But by keeping the stocks in the same company, you can save yourself from extra taxes and background checks. Furthermore, it also increases the productivity of the business, which has a direct role in making your startup cost-effective and successful.

After checking out the procedure and benefits of Stock Incentive Plans, it is quite clear that these plans can prove very beneficial to any business looking to gain and retain employees. Employees view it as they are investing in where they work and it makes them much better workers. And can give you certain advantages. Because of its importance and value, stock incentive plans must be carried out with extreme care. A little mishap while designing or granting it can cost you thousands of dollars and even your company.

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