This article was updated on July 19, 2018.
HR leaders may want to reconsider their organization's equity policy in light of how few employees exercise their options after leaving. Offering equity in the form of stock options — in addition to salary and other benefits — can attract and engage employees, especially in the technology industries. The idea is that employees will work harder, even with lower salaries, if they can accumulate stock in a business that's growing in value. As they grow with the business, the value of their equity will grow too, creating a cycle of motivation and added value.
Overcoming Barriers to Stock Options
Taxes and related legal fees are barriers to the exercising of stock options for employees and firms alike. Few employees want to write a check to their former employer and then a second check to the IRS after they've left a job. And few businesses want to process the paperwork involved with stock options, not to mention pay the related fees. Other barriers can include the uncertainty around the valuation of the stock or a lack of understanding by employees about what rights and responsibilities are incurred by owning stocks. Because of this, businesses should educate employees about equity policy.
Extending Policies Beyond 90 Days
It's common that employees who resign or are laid off typically have only 90 days to exercise their stock options. Messaging app Kik, which reached a valuation of $1 billion in 2015, began a movement to change the rules. According to Fast Company, the startup lets employees hold onto stock options even after they leave. "In doing so, it started a small trend: Pinterest followed suit the next year to much fanfare, giving employees seven years to exercise their options," Fast Company reports. This type of equity policy can attract and retain employees, especially in a competitive landscape.
Weighing the Pros and Cons
Offering a pro-employee equity policy differentiates organizations like Kik and Pinterest in a tight labor market. It can be more fair for employees and lessen the pressure on exiting employees — they don't face an urgent "use it or lose it" scenario where the door closes on their stock options after 90 days. Additionally, organizations can take a long-term approach to the question of whom owns its equity.
On the other hand, extending the option exercise period may have a downside in that more employees may accumulate more stock, making less equity available for public offer. Organizations exploring an increase in the time to extend stock options should consult their legal, tax and financial professionals before changing any relevant policies.
Changing your equity policy by extending the time frame for exercising employee stock options could be a more equitable approach to employee engagement and make your organization a more attractive destination in a tight labor market.