Stock Compensation Arrangements: Trigger for Holistic Wealth Management

About a third of the largest publicly traded companies in Canada offer their employees stock compensation arrangements.

Recently, Shopify announced that they will be overhauling their employees’ compensation arrangements, offering them a choice between cash or stock. But do the recipients of these compensation arrangements truly understand the risks associated with investing in stocks? Are they aware of how these securities fit within their holistic wealth management plan?  It’s a real opportunity to add value as we head into an economic renewal.

When employees are given the option to become a shareholder, they will likely need securities advice to truly understand their stock compensation options; specifically, the financial, tax, and estate planning considerations.  Here are some quick facts about employee stock compensation options and my personal view on the importance of planning to integrate these opportunities into a holistic wealth plan:

Why is employee stock compensation and incentives relevant today?

• With almost ~7500 publicly traded companies in North America and with a growing need to attract and retain top talent within organizations, we are seeing a rising amount of equity-based compensation arrangements being offered to employees.
  • 2020 – 3922 publicly traded companies in Canada[2] and 3,530 in USA[3]
• As a result, we must remain mindful that equity-based compensation arrangements concentrate employee’s savings into a single company's stock, which may not be suitable for all investor types; Not to mention the risks associated with having one’s employee benefits, income security, pension plan, and investments savings all tied to one company.

Why do companies typically want employees to be shareholders?

• Encourages employees to think like shareholders – thinking strategically, thinking long-term and thinking about the best interest of the company.
• Stock or stock options offered as a performance bonus can incent a better performance and/or desired behaviors by key employees, which may lead to increased retention of key employees.
• A method of compensation where the company/employer does not have to come up with cash to pay the employees.
• Having employees acquire shares is a method of raising capital for the company.

What Types of Stock Compensation Arrangements are Predominately Offered?

• Stock benefits are company-run programs in which participating employees have the ability to purchase company shares via payroll deduction. These plans are usually offered to all employees at a company and are often offered to encourage employees to be personally invested in the growth and future success of the employer/company.
  • Stock Purchase Plans – Employee Share Purchase Plans (ESPP): A option granted to employees of a publicly traded company to purchase common shares via their automatic payroll. May be matched by the employer and shares may be purchased at a discount to FMV.
• Stock incentives are a popular form of employee compensation, where the employee receives rights to company stock instead of cash. These are often offered only to a select group of employees as a means to attract and retain talent.
  • Restricted Share Units (RSUs): A right granted to an employee to receive the value of one share at a fixed future date(s); RSUs are typically used to defer the annual bonus; RSU may be subject to forfeiture in certain circumstances prior to vesting
  • Performance share Units (PSUs): consist of stock-denominated shares or share units (performance shares) and grants of cash or dollar-denominated units (performance units) earned based on performance against predetermined objectives over a defined period.
  • Stock option plans: A right granted to an employee to purchase a fixed number of shares of the corporation at a fixed price over a specified term; the exercise right may be subject to vesting conditions.
  • Phantom Shares: Notional shares granted to an employee as a form of compensation that tracks the price performance of the company’s common shares.
  • Deferred Share Units (DSUs): A right granted to an employee to receive the value of one share on death, retirement, or termination of employment; DSUs are typically used to defer director’s fees and executive bonuses; DSUs are generally not subject to forfeiture.

Who is Eligible for Stock Compensation?

• ~1/3 of the largest publicly traded companies in Canada offer their employees stock compensation incentives or benefits[1].
• 100% of publicly traded companies’ CEO, senior executives and directors are recipients of stock compensation.
• ~1/3 of eligible salaried employees of publicly traded companies are eligible for stock incentive and benefits such as ESOPs, Options, RSUs and PSUs[4]

Who is participating in Stock Benefits[5]?

• Millennials rank equity compensation higher in importance then Gen X and Baby Boomers.
• Gen Y employees are more likely to work at companies that offer stock incentives and benefits, as they value having an ownership stake in their companies.
• More men tend to prefer and appreciate equity in a company (versus cash) than women.
• Participating in a stock benefit plan is a significant driver of employee engagement across all generations and genders
• Employee engagement is further enhanced when a company offers complementary programs that create an “ownership culture”.

• Basic materials and Technology, biomedical, energy, utilities, financials among others.

When it comes to stock incentive and benefit plans, employees need to understand how these securities fit within their holistic wealth management financial plan. They especially need guidance the following areas:

• Understanding market volatility and pricing of securities.
• When to exercise or sell their shares. (Execution Strategies)
• Income Tax Implications
• Preparing for Retirement or Departure of the Company
• Estate Planning

Bottom Line: Connect with your financial advisor, as they should serve as your financial quarterback to help you engage the right financial professional stakeholders who should be consulted to ensure you understand how the securities fit within your holistic wealth management plan throughout all your financial life stages: accumulation, growth, preservation and transition of wealth[6] in the joint decision-making process should change be required. Example: You may need to consult a IIROC licenced financial professional to under the risks associated with investing in securities, Tax Professional for tax awareness and Financial/Estate planner to discuss the retirement income and estate planning implications of security ownership.

Kristin Ramlal, B. Comm (Hons.), PFP, CIM, FCSI, RWM™ is a Securities Specialist with Canada Life Securities Ltd. 

References:

[1]Employers expanding equity compensation programs to attract, retain talent: survey: Employers expanding equity compensation programs to attract, retain talent: survey | Benefits Canada.com

Number of companies listed on the stock exchange, 2020 - Country rankings: https://www.theglobaleconomy.com/rankings/Listed_companies/)

Five Demographic Trends to Enhance and Evolve Your Equity Plan Now: 5 Demographic Trends for Equity Plans | Shareworks

Global Equity Insights 2018: Global_Equity_Insights_2018_web_final.pdf (equity-insights.org)

2018 global employee stock purchase plan trends survey: Insight and Challenges 2018 global employee stock purchase plan trends survey (deloitte.com)