How Much Risk Do You Want to Take?

Amid the stock market decline, some firms give employees a choice of how they’re paid: cash or equity. 





Thanks to the stock market’s steep decline, millions of employees, particularly in the tech sector, have seen significant chunks of compensation wiped out. But some firms are letting their own workers decide how much future risk they want to take with their pay.

In September, a prominent e-commerce firm, joining some other small outfits that have previously tried this, announced it was changing its compensation practices to let staff decide how much of their pay will be cash versus equity. The company will allow employees to choose a mix of cash, restricted stock units, and stock options, with the ability to withdraw equity immediately. Previously, management had determined the mix of cash and stock that staff would receive.

Experts say the rationale behind the plan is worth some attention. Giving employees more choice among their benefit packages can increase their loyalty, says Kristi Drew, a Korn Ferry senior client partner and global account leader in the firm’s Financial Services practice. Choice can also help connect an individual’s own purpose with the company’s. “Smart incentive programs are always a good idea,” says Victoria Baxter, senior client partner in Korn Ferry’s ESG & Sustainability Solutions practice.

It’s also a little bit of an experiment, says Tanya van Biesen , managing partner of Korn Ferry’s Board & CEO Succession practice in Canada. “This could be a way of aligning incentives, getting as many people as possible to be fully aligned with an ownership mindset.” In this case, the firm said staff will receive a 5% bonus if they allocate more money to equity than is required under the company’s plan minimum, a figure which will vary from country to country based on legal requirements.

This compensation tactic is used more often at start-up firms before they go public, says Juan Pablo González, a senior client partner and sector leader for Korn Ferry’s Professional Services practice. Employees who choose to be paid primarily in equity could see huge paydays if the company goes public, while the company can conserve its cash.

Companies that used this type of plan decades ago had the advantage of not having to treat stock options as an accounting expense.

 These days, however, those options aren’t free, in reality or on an income statement. And this type of plan could pose some interesting challenges over the longer term. As a company grows—and its stock price appreciates—employees who do the same job could be getting paid radically different amounts based on how they originally set up their compensation plan.

Companies are already working through pay-gap issues, whether it’s adjusting historic pay gaps among men and women or, more recently, reconciling the difference between the salaries of loyal employees and those of employees who joined during the Great Resignation, which are often far higher. “At some point are you delivering equal pay for equal work?” González asks.