A constant challenge facing employers is the question, what incentives will I provide to my key employees so they will work hard and remain loyal to the company? Bonus structure and high salaries are helpful, but do not always tie an employee to the company long term. That is why employers often desire the proverbial “golden handcuffs” that aligns an employee’s interest with the company’s long term success.
Employee Stock Option: One way to create “golden handcuffs” is by giving a stock option to the employee. This entails the employer offering the employee the opportunity to buy stocks in the company in the future, but for today’s market value. Once the employee has met certain conditions specified in the grant agreement, then the employee can choose to purchase the stock that has hopefully appreciated since the time the grant was made by the company. Stock Options, therefore, give the employee the desire to see the company succeed, but they may not work with every corporate structure.
Ownership Interest: Another known way of attaining employee loyalty, commonly used in professional employment, is by offering the employee an ownership interest in the company. This allows the employee to be invested in the company and creates a desire in the employee to help the company maximize its profits. While this may be a viable option for some, the problems that arise when granting ownership in the company to an employee is that:
1) the employer must relinquish some ownership interest in order to give ownership interest to the employee
2) the employee must find some way to pay for that ownership interest. Employers do not always desire to relinquish their ownership interests and employees often do not have the funds to purchase those ownership interests.
Stock Appreciation Rights: There is another option to create “golden handcuffs”. It is called a stock appreciation right. Instead of giving an employee ownership interest in the company, an employer can give an appreciation right in the company that becomes available after an employee has met certain requirements which may include a number of years working for the company. On the vesting date, the employer then pays to the employee the difference between the granting date value of the stock and the vesting date value of the stock. The benefits of a stock appreciation right are that the employer does not give an employee any ownership interest, and the employee does not need to provide funds to purchase the stock appreciation rights.
There are other considerations to be had when determining how to incentivize employees to work hard and stay loyal to the company, including tax implications for each of these options. A skilled attorney will be able to guide you through the issues and help you decide what options is best for your situation. If you have any questions, please call an experienced attorney at Udall Shumway PLC.
This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice regarding Determining How to Incentivize Employees, or any other personal injury, please feel free to contact Employment Law Attorney Brad Gardner at 480.461.5323, log on to udallshumway.com, or contact an attorney in your area. Udall Shumway PLC is located in Mesa, Arizona and is a full service law firm. We assist Individuals, families, businesses, schools and municipalities in Mesa and the Phoenix/East Valley.