Equity Compensation
Equity compensation refers to a form of non-cash pay that gives employees partial ownership in a company, often through stock options or restricted shares. It is commonly used to attract and retain talent, especially in startups or growth-stage firms.
How does equity compensation benefit employees and businesses?
Equity compensation provides employees with a partial stake in the company, which may offer them long-term financial benefits depending on the company's performance. As part of an equity incentive plan, equity compensation can build wealth as the company grows. Companies may offer equity compensation to reward employees, preserve their cash flow, and reduce payroll costs.
What types of equity compensation are available to employees?
Common types of equity compensation in the U.S include stock options, restricted stock units (RSUs), employee stock purchase plans (ESPPs), and performance shares. Each type comes with different rights, tax implications, and possible vesting schedules.
How is equity compensation taxed for employees?
Taxation depends on the type of equity and when it’s exercised or vested. Employees may owe income tax when they earn or sell their shares. Capital gains tax may apply if shares increase in value before being sold.
When can employees access or sell their equity compensation?
Employees can access or sell their vested equity, which typically occurs over a set period or upon meeting specific performance criteria. Additionally, some plans impose restrictions that prevent selling shares until specific conditions or timeframes are satisfied.
Dive Deeper with Justworks’ Resources
Get a closer read on relevant topics related to benefits, payroll, HR, compliance, and more.
