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Total Rewards: Communicating the Value of Equity
Tips for demystifying a critical compensation tool for attracting and retaining talent
It’s no secret among HR pros that strong Total Rewards offerings are critical for attracting and retaining talent. Crafting a compelling total rewards package is only half the battle; employers need to effectively communicate its value to employees and prospective hires, especially in a white-hot talent market.
Founders Circle Capital convened our CHRO|Circle and brought in three experienced leaders to help guide a conversation on best practices for total rewards communication: Brittany Flanagan (VP of Talent at York IE and former VP of People Ops at PillPack); David Oppenheimer (former CFO of Udemy turned board member and advisor); and Lee Kirkpatrick (former CFO of Twilio turned board member and advisor).
Communicating the Value of Equity
CHROs agreed that equity is the most challenging aspect of total rewards to communicate to prospective hires and employees. Equity is a powerful long-term incentive, but employees don’t always know or understand what their equity is worth or how it affects their total compensation.
Equity education was one of the critical areas Brittany Flanagan looked to address when she first joined PillPack, which at the time granted equity to all full-time and hourly employees.
“We started with presentations at the all-staff meetings that broke equity ownership down to help employees understand how it could contribute to their lives. Everything from the basics like ‘what is a stock option’ to the mechanics of vesting periods, exercise dates, and dilution. We found that using visuals and personal anecdotes helped to make the content relatable.” – Brittany Flanagan, former head of HR and People Ops at PillPack
In addition to breaking down equity conceptually through internal presentations and a robust FAQ posted on PillPack’s intranet, Brittany partnered with finance and legal to create an “equity explainer” calculator that could model out equity values based on various exit scenarios. The calculator became a valuable tool for helping employees see the tangible value of their equity, she said. “Particularly as we got closer to the Amazon acquisition, we would use it in conversations with employees and key executive hires to help them understand what their equity could do for them.”
Calculators were a popular strategy among a few CHROs; however, former CFO David Oppenheimer cautioned that they carry a good amount of risk if forecasts don’t align with actual equity payouts. If you use a calculator, it should never be shared directly with an employee or candidate. The calculator should instead be used as a tool to walk an employee through a specific scenario in a live meeting, such as understanding the impact of exercising options, or to help a candidate compare job offers.
Navigating Down Rounds, Declining Valuations, or Adverse Market Conditions
The flipside of equity is that it can become a communication hurdle to address when the company’s stock price or valuation drops. Employees may become worried about their options being underwater or become less confident in their equity’s long-term value, which can adversely affect retention.
Lee Kirkpatrick walked the group through several paths at a company’s disposal, from repricing existing options to granting new options at a lower 409A, each with a varying impact on employee recruitment or retention. Lee said that whatever changes happen at the equity plan level, the CHRO needs to be in lockstep with the CFO and the leadership team. The CFO, in particular, can help model out various fundraising and exit scenarios to help analyze the impact on equity value and dilution.
David Oppenheimer added that equity is a long-term incentive, and companies can and should lean into cash and bonuses when equity starts to lose value in the eyes of employees and candidates. Unfortunately, it’s a situation more CHROs may find themselves dealing with over the coming years, said David, who compared the current economic climate with the 2008 financial crisis.
“We may find ourselves in a place where cash is king. Employees and candidates will want to know what they’re getting paid now in cash or bonuses because they’re not sure what their stock will ultimately be worth.” – David Oppenheimer, Audit Committee Chair at Quotient and former CFO of Udemy
Internal Total Rewards Communication
Giving employees a holistic view of their total rewards is a critical retention tool to ensure they consistently see the total value of their employment, especially when they’re being tempted away by recruiters. As one CHRO pointed out, the challenge is that benefits and compensation are often dispersed across multiple systems. They asked, “how do you give an employee a clear, singular view of their total benefits and compensation?”
Cloud-based benefits solutions like Pave and Workday offer total rewards statements as a feature; however, there is typically a lot of backend setup and maintenance needed. Companies with fewer resources can start small with just a centralized intranet landing page that links to all of the different resources and systems an employee needs to access as part of their total rewards, said Brittany. Overview sessions such as webinars or lunch and learns for new hires and existing employees can also be an effective tool and provide a forum for specific questions or feedback.
Alignment With Your Hiring Managers
Another critical piece of your total rewards communication strategy is educating your hiring managers. They are on the front lines of conversations with employees and candidates. Therefore, it is essential they understand your total rewards – especially equity.
One CHRO found success in creating an entire training program for people managers on total rewards that included FAQs, scripts to refer back to in compensation conversations with employees, and other resources. A survey was sent out to employees at the end of the program to gauge the manager’s proficiency and performance, asking how well managers understood and communicated total rewards.
As the war for talent gets even more fierce, and market conditions remain uncertain, total rewards will become an increasingly important lever for talent acquisition and retention.
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