Are you a business owner thinking about giving equity to your key employees to thank them for a job well done? I am Katherine Taylor, the lawyer for business owners and I am going to give you a few tips as to when you should and should not do that.
The first thing that you really need to know and understand is that when you provide equity compensation to employees — key employees — you are basically giving them ownership in your business. And even if it is not a lot of ownership, you are giving up some control that you now have. If that is okay with you, that's great because equity compensation is a wonderful way to incentivize hard work and to give a key employee the feeling like they really have a stake in the business. But many times, it is not practical. The first reason it is not practical sometimes is because you may not want to give up control. But also putting these plans into place can be expensive from an administrative and even a legal standpoint.
The good news is that there are some ways that you can provide similar types of compensation to your employees without having to give up the control of your business by offering equity. One is a bonus plan, and the bonus plan can be based on the profits of the business — the production of the employee — frankly, anything you want it to be. That type of compensation can certainly incentivize an employee. Another type of benefit you can offer is what is called a phantom stock plan — kind of like a bonus system, but the compensation is meant to mimic the ownership of stocks. So, for instance, if there is an increase in the value of the stock over a period of a couple of years, then the bonus to the employee would account for that increase in the value of the stock without turning over the stock to the employees. So, it is great if you want to incentivize your employees.
Before you look into it further, you need to first talk to your accountant and then give us a call to find out if this is something practical for your business.
KATHERINE L. TAYLOR, ATTORNEY AND CPA
5850 Waterloo Rd
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