Equity awards: Overview, definition, and example
What are equity awards?
Equity awards are compensation given to employees, executives, or other stakeholders in the form of company stock or stock options. These awards provide recipients with an ownership stake in the company, typically with the goal of aligning the interests of employees with the company’s performance and encouraging long-term commitment to the organization. Equity awards can take several forms, including stock options, restricted stock units (RSUs), performance shares, and stock appreciation rights (SARs).
The value of equity awards is typically tied to the company’s stock price, so recipients benefit financially when the company performs well and the stock price increases. These awards are often used as a part of employee compensation packages, especially for high-level executives, as they provide an additional incentive to drive company success.
Why are equity awards important?
Equity awards are important because they help companies attract, retain, and motivate talented employees. By offering a stake in the company, employers can incentivize employees to work towards the company’s long-term goals, as the value of their equity awards will increase if the company performs well. They also serve as a tool for employee retention, as many equity awards are subject to vesting schedules, meaning employees must stay with the company for a certain period before they can fully benefit from the award.
For employees, equity awards offer the potential for significant financial gain if the company’s stock increases in value. They also provide a sense of ownership and connection to the company's success, aligning employees’ interests with that of shareholders.
Understanding equity awards through an example
Imagine a tech company, Company X, wants to attract top talent to its executive team. As part of an executive’s compensation package, Company X offers stock options that allow the executive to purchase company stock at a set price after a certain period, known as the vesting period. If the stock price rises over time, the executive can purchase shares at a lower price and sell them at a higher price, realizing a profit.
In another example, a retail company offers restricted stock units (RSUs) to its employees as part of a bonus structure. The RSUs grant employees the right to receive company stock after a specified vesting period, typically based on continued employment. The value of the RSUs depends on the company’s stock price, so if the stock increases in value during the vesting period, the employee will benefit financially once the RSUs vest.
An example of equity awards clause
Here’s how an equity awards clause might appear in an employment agreement or executive compensation plan:
“The Employee will be granted 5,000 stock options under the Company’s Equity Compensation Plan. The options will vest over a four-year period, with 25% vesting on the first anniversary of the grant date and the remainder vesting in equal quarterly installments thereafter. The exercise price of the options will be the fair market value of the Company’s stock on the grant date.”
Conclusion
Equity awards are a powerful tool used by companies to incentivize employees, align their interests with those of shareholders, and retain key talent. By offering employees an ownership stake in the company, businesses can motivate them to work towards the company’s long-term success. Whether in the form of stock options, restricted stock, or other equity-based instruments, equity awards provide employees with the opportunity to benefit from the company’s growth and increase their financial stake in the organization.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.