How can you determine the right amount of equity for executives?

1 Understand the market

The first step to determine the right amount of equity for executives is to understand the market practices and trends in your industry and peer group. You can use various sources of data, such as surveys, reports, proxy statements, and online platforms, to compare and benchmark your equity offerings with those of similar companies. You should also consider the level of competition and demand for talent in your market, as well as the expectations and preferences of your potential and current executives.

3 Choose your equity instruments and mix

The third step to determine the right amount of equity for executives is to choose your equity instruments and mix. You have various options for how you can grant equity to your executives, such as stock options, restricted stock units, performance shares, or phantom stock. Each option has its own advantages and disadvantages, such as tax implications, vesting schedules, dilution effects, and accounting treatment. You should choose the instruments that best suit your objectives, philosophy, and budget, and that are attractive and understandable for your executives. You should also decide on the mix of equity and cash in your total compensation package, and how you balance fixed and variable components.

4 Establish your valuation and allocation methods

The fourth step to determine the right amount of equity for executives is to establish your valuation and allocation methods. You need to have a reliable and consistent way of estimating the fair value of your equity grants, as well as the potential upside and downside scenarios. You can use various methods, such as discounted cash flow, market multiples, or option pricing models, depending on the availability and quality of data and assumptions. You also need to have a transparent and fair way of allocating your equity grants among your executives, based on their roles, responsibilities, contributions, and performance. You can use various criteria, such as market benchmarks, internal equity, individual potential, or strategic priorities, depending on your philosophy and goals.

5 Review and communicate your equity plan

The fifth step to determine the right amount of equity for executives is to review and communicate your equity plan. You should regularly monitor and evaluate the effectiveness and fairness of your equity plan, and make adjustments as needed to reflect changes in the market, the company, or the individual circumstances. You should also communicate your equity plan clearly and frequently to your executives, and provide them with the necessary information and education to understand and appreciate their equity compensation. You should also solicit their feedback and input, and address any questions or concerns they may have.

6 Seek expert advice

The sixth and final step to determine the right amount of equity for executives is to seek expert advice. Equity compensation is a complex and dynamic topic, and it involves various legal, financial, tax, and accounting issues. You may not have the expertise or resources to handle all the aspects of your equity plan on your own, and you may benefit from the guidance and support of external professionals, such as consultants, lawyers, accountants, or brokers. They can help you design, implement, and manage your equity plan, and ensure that you comply with the relevant laws and regulations, and that you optimize the value and outcomes of your equity compensation for your executives and your company.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?