Increased Worker Access to Equity and Ownership
Aligned incentives, increased liquidity, and shared prosperity
|Katelyn Donnelly||Jun 7||1|
Consumers and individuals are more aware of assets, stores of value, and ownership. Over the last year, there has been a proliferation of new retail investors and interest in investing, partially brought on by the ease of access to traditional investments on platforms like Robinhood and the rise of cryptocurrencies, which have seen rapid appreciation.
It is no surprise that employers and workers alike have expressed increasing interest in using equity and ownership stakes as an incentive in compensation for employees and for work completed or value added.
Stock-based compensation isn't new, but it is growing. Aon found in 2020 that 49% of S&P 500 companies and 39% of Russell 3000 companies offer an Employee Stock Purchase Plan. It's worth digging into the detail by industry, company size, and geography. As you might suspect, California leads the way.
Several reasons explain the building interest in employee equity:
First, over the last ten years, the share of income going to capital has increased relative to labor. Economists focusing on the corporate sector have found that the labor share of income declined by eight percent over the period 1980-2012, from 65 to 57 percent. Returns to capital are growing. Rare exceptions are the ones who get wealthy on their salary. Wealth is built by owning assets.
Second, high-growth technology companies have increasingly relied on stock-based compensation to reward employees. The tech industry has established best practices in modern business and management, particularly in the talent management domain, as talent is the life-blood of startups. Almost every startup has a dedicated pool for employee stock options or stock-based compensation, which is used as a critical tool to attract and retain employees.
Third, investors and managers alike see shared ownership as a way to align incentives around outcome-based performance. Both employees who are building a company's infrastructure and important external stakeholders such as power users, community members, and loyal buyers can be incentivized and rewarded. In the US, brands have found power in crowdfunding investment from their dedicated customers and users. These true believers now own a piece of the company and their ongoing belief and contributions may be rewarded as the company performs.
Why is now an inflection point?
1) Employees, particularly millennials and those in the technology industry, expect stock as a component of compensation. Millennials have shown an acute awareness and interest in equity compensation, as the result from a survey by Schwab Stock Plan Services show:
77% of Millennials surveyed said equity compensation was a very attractive benefit. An increasing number consider it to be the main reason or one of the main reasons they took their current job (37%, up from 28% in 2019).
Millennial respondents are the most likely generation to identify equity compensation as the main reason or one of the main reasons they chose their current employer (53%).
Despite the demand from millennials, they currently own less than 10% of the stock market as data from Federal Reserve below shows.
2) Increased prominence of private markets. According to McKinsey, private market assets under management grew by ten percent in 2019, and 170 percent in the past decade. The number of active private equity firms has more than doubled and the number of US sponsor-backed companies has increased by 60 percent. As more US employees work for private companies, new equity plan solutions will be devised that gives shared ownership.
3) Increased liquidity mechanisms. Over the last ten years, there has been a shift to private markets and a slow but corresponding rise of secondary markets. There is increased liquidity for traditionally difficult to trade assets. The rise of cryptocurrencies and tokens is an expression of the ability for markets to put a value on almost everything and make that value exchangeable. We are still in the early days of secondary markets, but the trend is clear: toward more real-time and accessible trading. For example, Forage is one of the largest secondary markets for pre-IPO private shares.
4) Addressing inequality. Top management and CEO compensation have been rising, and a significant portion of the packages are in stock-based compensation, as research from Harvard shows (see below). A 21st Century company will aim to build wealth together with its employees. It is also only a matter of time before ESG-related pressures come for more equitable stock distribution.
5) Encouraging laborforce participation. We currently face a tight labor market and that will only increase as Baby Boomers retire. We were already at the lowest rate since 1980 before the pandemic. Companies’ ability to issue stock, rather than cash compensation, may enable the incentives to recruit people back to the workforce.
There is an opportunity to make stock and equity compensation plans turn-key for smaller companies to implement and simple for recipients to understand.
Simplicity and clarity should increase the value of the equity as it will function as an incentive that employees will not discount relative to cash compensation. There are equity administration-as-a-service companies seeking to capture the opportunity. Carta has been the game in town for companies to manage their cap tables but has a more limited offering on the employee side. Pulley is another startup focused on cap tables and options but less focus on equity plans.
Startups include Upstock*, which makes it easy to adopt an employee stock unit plan and built engaging dashboards to help workers understand the value of their equity, are seeing strong demand from a wide range of customers from growth-stage startups to small, local businesses. Others like Figure focus on benchmarking entire compensation plans that include substantial equity or options-based components.
Savvy private owners, particularly in private equity, can also benefit by implementing smartly structured plans. For example, KKR uses employee equity to align incentives with frontline workers. Leading this movement for KKR is co-head of North America Pete Stravos, who recently set up a foundation to promote employee ownership. KKR portfolio company Ingersoll Rand recently awarded $150 million in equity grants to about 16,000 global employees and has seen increased impact on employee morale, employee engagement, employee retention, and company performance (600 -1,200 basis point improvement in EBITDA according to KKR).
How could this trend go wrong?
Stock plans can be complex or be presented in a confusing manner. In order for the benefits to be realized, those who own assets need to understand the terms, conditions, and potential upside.
Stewardship and performance matters. Although the US has been in a bull market for over 10 years, not all stocks and ownership stakes increase, and they don’t increase evenly. Navigating through downturns and market corrections is vital. Leadership at the top matters and need to operate with integrity, transparency, and fiduciary responsibility for the benefit of shareholders.
The tax and regulatory environment could change to make equity ownership less financially rewarding and more complex.
Bottom line: Broad access to equity and ownership is a long-term mega-trend that will continue to accelerate. Investors, managers, and owners will see the benefits of the alignment of incentives using shared ownership as a tool. Employees appreciate sharing in the upside and ownership of their work.
National Center for Employee Ownership - Data
Employee Equity Plans - Thoughts from Gusto
Video of Pete Stavros of KKR speaking at their 2018 Investor Day about the impact of employee equity on their industrials group performance
Information from Carta on how to evaluate different equity plans
*I am an investor in Upstock through Avalanche VC