For many employers, equity has long been thought of as “free lunch”—cheap and easy to give away. But times are changing. Macro forces like depressed valuations and higher interest rates have pushed companies to reconsider the old “peanut butter” approach to spreading equity around to everyone. People are becoming more creative and targeted in the ways they manage employee equity.
We’re now in what could be considered a renaissance in equity program design. What does that look like? In a webinar on the equity compensation landscape, Pave Founder & CEO Matt Schulman was joined by David Knopping, Founder & Managing Director at Alpine Rewards, to talk through some key equity trends from Pave’s data. Here, we’ll dive into some of their insights.
Equity Compensation: Determining your Philosophy
“There are kind of two prevailing philosophies,” said Matt Schulman, Founder & CEO of Pave. “One is: give equity to everyone. The second is: have a really targeted approach, where you think about all the different dimensions in which you can target your equity program.”
Both approaches have pros and cons. A broad-based equity program can help build a culture of ownership among employees, as well as help attract talent. However, in order to keep equity burn under control, companies have to decrease the size of the grants for each individual employee. On the other hand, designing a targeted equity program makes it easier for companies to manage burn rates and give larger grants, but it also means that some employees are inherently left out of equity participation. For some companies, this approach conflicts with the core philosophy of granting equity.
If you’re willing to make distinctions around equity participation, diving into the data will help you understand what levers you can pull to design a targeted equity compensation program.
Matt surfaced some of these trends on LinkedIn—see what the community had to say.
Trends in New Hire Equity Participation
If you decide to design a targeted equity program, you have decisions to make when it comes to who gets equity on day one. There are a few common factors you can consider, including level, region, and job function. Here’s a look at what companies in the Pave dataset do.
When companies take a targeted approach based on level, they tend to grant equity to more senior individual contributor (IC) employees rather than entry-level hires. It’s often more challenging to hire senior talent, and they tend to have more leverage in hiring conversations, particularly when they’re leaving equity on the table at their previous employer. To both attract and retain those senior roles, it’s unsurprising to see a higher percentage of individuals at those senior levels receiving equity grants.
When we look at new hire equity participation by region, we see a big drop in new hire equity grants outside the US. There are a couple factors at play here, including the administrative burden of dealing with equity in other countries, like various associated tax laws. It could also be due to a lack of perceived value of equity in regions where it may not be as meaningful, and therefore not as helpful a tool to attract talent.
Another regional approach is to consider an employee’s location within the US. New hire equity participation is 16% lower in Tier 3 US cities than in Tier 1.
“I think it's a function of the competitive labor market,” said David. “Those Tier 1 cities, [like the] San Francisco Bay Area, there's so many different companies you can go work for, versus maybe in some of our Tier 3 cities. The market is just less competitive, and we're gonna be more targeted in what we do.”
Another consideration when determining your equity participation is job function. Equity can be a difference-maker in hiring for certain high-demand roles, particularly when multiple offers are on the table. Relative to R&D, Sales and G&A roles are less likely to receive new hire equity grants. These positions are typically more closely tied to revenue generation and operational support rather than innovation or product development, where equity is often used to align long-term incentives with company growth.
Trends in Equity Refresh Grants
Of course it’s not just new hire equity grants where companies can target their spend. Let’s take a look at some of the data around refresh grants.
At private companies, level and tenure largely drive refresh equity participation. As we can see, entry-level employees are less likely to receive refresh equity than mid-level and senior employees. When it comes to tenure, it’s common to wait to award refresh grants until employees reach two or more years of tenure. That said, there isn’t a one-size-fits-all practice for equity refresh at private companies.
In public companies, we see a higher proportion of companies granting equity after one year of tenure, regardless of level.
“For public companies, of course, the key difference with equity is that it's 100% liquid when you receive it,” Matt said. “If you're a public company employee receiving an RSU, it's kind of like cash when it vests. A lot of employees immediately will sell and diversify or use it to buy something else.”
Performance is another lever that companies can pull when it comes to refresh or ongoing grants. Many refresh programs emphasize employee performance, either as the criteria for participation or as a multiplier of the grant size. Rewarding top performers with larger refresh grants reinforces the message that those employees are critical and valued, helping to increase retention.
Rethinking Your Equity Compensation Strategy
Designing an equity program that suits your business is a crucial element of compensation strategy. When evaluating what’s right for your company, consider factors like job level, job family, location, and performance.
It’s complex, and there’s no one right answer. For more details, view the full conversation between Matt Schulman and David Knopping in the on-demand webinar.
If you’re ready to design your company’s equity program, Pave can help. Our Premium Market Data gives you real-time equity data from private and public companies to set equity compensation in line with the market. Plus, access insights into how companies design their equity programs. See it in action—request a demo today.
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