Part 3 of my ongoing “Stock Options on the Precipice” series. How much equity should I give (or get)?
It’s probably the most common question I get asked. The answer, as I am sure you know, is “It depends”. And, with equity compensation the final answer is even squishier than other types of compensation. Data seems to be all over the place. Trends appear to vary based on who is providing them. It often feels like survey data is pulling companies in specific directions, when it should be reflecting directions that have already been taken. What in the heck is going on?
You haven't lost your mind. Equity compensation really is that messy. It is (at least) variable, variable, variable, variable, variable, variable, variable, variable, variable, variable, variable compensation. That’s right, it’s at least eleven times as fun as basic variable compensation.
Imagine your pay programs as a rocket ship. Most of the engines thrust in a single direction and several smaller ones thrust in other directions to provide steering. With equity compensation, the analogy is even more complex. We have:
Variable stock price on the date of grant (the launch pad)
Variable stock price over time (the basic trajectory)
Variable types of equity (vehicles)
Variable number of shares (size of ship)
Variable terms and conditions (the payload and design)
Variable currency rates (external uncontrollable forces that impact direction and speed)
Variable performance metrics (the tasks that must be performed and milestones that must be met)
Variable methods of valuation (the outsiders definition of potential success)
Variable comp philosophy (the whole reason you are launching the thing and the budget that supports that decision)
Variable types and stages of companies
Variable potential exit to liquidity events and event horizons
Most equity survey data is reported on a point-in-time basis, but nearly all equity compensation lives and changes over many years. None of the data is both specific enough to cover all variables and broad enough to cover a significant group of companies. Frustratingly, narrow cuts of data almost always exacerbate any problems. Each of the variables contributes to the monetary values, shares amounts or percentages of overhang and ownership that are shown in survey data. A big change in any one of them may, or may not, materially impact all of the others. Now imagine each variable changing for virtually any grant and company in your favorite survey data.
Without knowing the intent and path of every variable, any decision you make is at least partially a guess. Compare this to base pay. When you tell your CEO or CHRO that a given role should be paid approximately $130,000 in base pay, you can be confident that you are pretty close to the right number. When you give a similar number for equity compensation you need to understand both the current anecdotal and scientific data. You also need to understand that the scientific data is a lot like the science of physics before anyone realized there were basic laws of physics. You can be confident in what you believe, but be careful of what you use to prove your knowledge!
But don't despair, all is not lost! Lots of great things happened before the basic laws of physics were finalized. It took very bright people, a lot of experience and a bit of luck, but amazing things got done. The same is true for equity compensation, especially when the markets (private and public) are uncertain and frothy. Stick with me through this series and I will do my best to help you understand how to navigate equity compensation and succeed (even when the science isn't always there to back you up). Feel free to go back and read the prior articles in this series 1. Employee Stock Options on the Precipice?; 2.Equity Compensation Triage Assessment to gain a bit more foundation.
Dan Walter, CECP, CEP is the President and CEO of Performensation. He is passionately committed to aligning pay with company strategy and culture and has been deeply involved in equity compensation for a long, long time. Dan has written several inustry respurces including, Performance-Based Equity Compensation and “Everything You Do in COMPENSATION IS COMMUNICATION”, with Comp Café writers, Ann Bares and Margaret O’Hanlon. He has co-authored “The Decision Makers Guide to Equity Compensation”and “Equity Alternatives” and a few books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation and @SayOnPay.