Tech startups have long used equity stakes as part of their new hire compensation programs, but many in the financial industry are now doing the same thing. Giving partners and rank-and-file employees a direct stake in the practice has obvious benefits for business owners, from greater loyalty to a willingness to stick with the firm through the lean years.
If you are thinking about adding an equity package to your employee compensation structure, it is important to value that equity properly and distribute it fairly. A poorly thought out equity compensation package could backfire badly, damaging your firm in the process and hurting employee loyalty in the long run.
The Value of Unbiased Advice
Before you can offer equity to your strategic partners and key employees, you first need to know what the business is worth on the open market. Valuing an existing financial planning or wealth management practice is not an easy thing to do, especially for the current owner. That is why it is so important to seek out impartial and unbiased advice, and services like Truelytics can be a big help.
Truelytics and services like it help practice owners understand the true value of their firms, making everything from future sales and estate planning to the development of equity compensation packages far easier. Once you know what the practice is worth today, you can move forward with an equity compensation program that will be beneficial for you, your key employees and partners and everyone else involved.
Key Considerations in Equity Valuation
Rewarding key stakeholders with equity in the company is a complex process, and there are many things to consider. Arguably the most important consideration for each key stakeholder is what percent of outstanding shares each equity grant represents. Once you know that, you can develop an equity compensation package that rewards the key stakeholders in your practice and gives them an incentive to serve your needs as well as their own.
It is also important to remember that equity is not a static thing and that as changes take place in the company, the value of those equity shares will change. That means you may need to readdress the amount of compensation your key stakeholders receive and the number of shares they own.
A Moving Target
You will also need to address equity compensation every time you bring a new team member on board. Some practice owners prefer to limit equity and stock ownership to the key decision makers in the company. Other practice owners feel that extending equity positions to individual brokers, financial advisors, and others encourages teamwork and cooperation and builds loyalty among the staff.
No matter which option you choose, you will need to address equity ownership as part of the hiring process. Thanks to the tech industry, many workers, especially those with valuable and in-demand skills, have come to expect equity packages as part of their compensation. When jobs are plentiful, and unemployment is low, you may need to respond with more generous equity compensation packages of your own. Competition for top brokers and financial professionals is always fierce, and the presence of a solid equity compensation package could tip the scales in your favor and help you succeed in a tight labor market.
At the same time, you will need to make sure the compensation packages you offer new stakeholders are competitive with the equity packages current stakeholders already enjoy. Revisiting compensation packages, including equity grants, from time to time is the best way to ensure your practice is still competitive with others in the industry.
Exercising Options
It is important to note here that equity compensation does not come in the form of immediate cash. The key stakeholders you hire are likely to be seasoned financial professionals, so they will no doubt have a keen understanding of how equity compensation and stock options work. They will understand that the options they receive today will not be immediately exercisable and that they will vest over time.
Developing a vesting schedule is another key consideration, one that can greatly impact the value and attractiveness of the equity compensation being offered. Since equity compensation is designed as both a reward and an incentive, the vesting schedule matters a great deal. You want to reward your key stakeholders for their contribution to your practice, and you do that through a grant of equity in the firm.
At the same time, you want to encourage long-term loyalty on those key stakeholders, and you want to encourage them to stay and contribute to your practice for many years to come. The structure of the vesting schedule can help you accomplish both goals, encouraging loyalty among your existing stakeholders, attracting the best performers in the industry and rewarding the best and brightest among your existing staff.
Rewarding Ongoing Performance
As the owner of a financial planning or wealth management practice, you can also use stock option grants and company equity to reward your top performers. Incentive stock options are powerful tools in the financial planning industry, and big firms routinely use them to reward their top performing brokers, agents, and other professionals.
You can apply the same concept to your financial planning or wealth management practice. As the owner, you probably already have an annual review process in place, and tying ongoing equity compensation to the results of those performance reviews allows you to reward your best brokers and advisors while encouraging continued loyalty among your staff members.
Compensating key stakeholders fairly can be a challenge in the financial industry, but the more you know, the easier it can be. Cash compensation is important, and it is still the key to attracting the best performers in the industry. But an attractive salary may not be enough to bring in the best and brightest, and adding equity compensation to the mix can be a winning formula. Whether your firm is just getting started or has been in business for years, there are compelling reasons to use equity as part of your overall compensation package.
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