How To Retain Employees: Building Equity and Fostering Motivation

The overarching, big time problem that is facing the American business owner is employee engagement (basically motivation). Depending on which study you look, at over half of the working population is not engaged in their work. Meaning they just show up and do their job, which is fine but if they “just show up”, you’re not going to get any real, solid, work out of them. You’ll just continue to get a lazy effort and sub-par results in your business, or at least not as good results as you could be getting with more employee engagement.

Now I’m sure you’re like “cool, that sounds great but how can I engage my employees?”. Well, in my opinion the best way to do that is through giving your employees equity in the company. Which should scare any employer, equity is a scarce commodity, I mean you only have one company and once you give up equity that is it, you are no longer the only owner in a company. However you can negate this concern by making sure you still have over 50% percent ownership. But another problem is the tax complications, and complications in general of having an Employee Stock Ownership Plan, or ESOP for short.

However one way to give an employee ownership and not be subject to an ESOP is to give what is called phantom equity. Phantom equity/shares/etc. are a way to give an employee an equity like vehicle and allow them to enjoy the success of the company along with the ownership. Granting phantom stock rights allow employees to align their goals with the business ownership, including but not limited to increasing the stock price, and generating net income.

Also there is no tax impact when the grant is made but the employee will be tax on the options as ordinary income to the grantee/employee when there options are exercised. Also they are pretty much considered deferred compensation and any owner that is looking to get into phantom stock grants should consult with an accountant before finalizing it as it subject to the same complex tax rules as deferred compensation. Basically this tool for employee motivation, retention and engagement is not for the lay person. But if it is executed correctly it could help your business in a big way because instead of “just showing up” they will be just as motivated as you, the business owner, probably is.

DISCLAIMER: This is not financial advice and phantom equity vehicles are extremely complicated and should be consulted with both financial professionals and certified public accountants. Also I am not a financial advisory professional. And any financial decisions should be made with the help of a financial advisory professional.


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