Equity Compensation is in a Class of its Own

The origin of the word equity is not, as many people think, the word “equal.” In fact, its origin is almost the opposite of equal. “Equite” is a Roman word with the following definition: "members of a specially privileged class derived from the ancient Roman cavalry and having status intermediate between those of senatorial rank and the common people." Equity is about privilege. Looking back, horsemen have almost always been considered a privileged class. On horseback Roman soldiers, Arabian princes and Native American hunters were professionals that others admired and envied. They have been the source of heroic stories and historic moments. Horse and man have also been the basis for less glorious stories of wild-west outlaws, and armies of invaders conquering the innocent. Horses have been the basis of great and tragic stories that have caught the public’s imagination.

Fittingly, the use of equity compensation has given rise to a new class of professionals. Holders of stock options during boom times have been given iconic status. Close your eyes and envision them. The millionaire secretary. The billionaire engineer. The serial entrepreneur who owns several houses and continues to work for more. Equity compensation has allowed those of a common background to obtain heights that usually only come from being born of privilege.

Of course, along with its ability to bring fortune and status, equity compensation also has its down side. During bad times it has brought us stories of tragedy and villains. The programmer who lost his house to AMT. The CEO who made millions while his company went under. The company that backdated options to guarantee success. These themes are not new. The instrument of demise has changed, but the results have a familiar ring.

Equity compensation is not truly about being equal.  It’s about providing individuals and companies an opportunity to grow to a new class. It is this unique aspect of equity compensation that brings both its praise and its scrutiny.

We should keep this in mind as we plan for the compensation season ahead.

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