In the war for talent, sometimes you can feel like David going up against Goliath. One piece of ammo you can consider for your slingshot is equity compensation plans for key employees.
“If you’re an owner-operator looking to maintain your viability in a market full of private equity-owned firms, then equity comp is an alternative that puts you on the same playing field,” says Byron McFarland, founding principal of The McFarland Group, which specializes in business succession and equity compensation planning.
Why Offer Equity Compensation?
Ryan Markewich, owner of Creative Roots Landscaping, based in British Columbia, Canada, says he decided to provide equity compensation to his employees because he wanted to reward those who had helped build the company and continue to play a role in its growth.
“I subscribe to the idea that there’s such a thing as ‘enough,’” Markewich says. “I had reached that point and wanted to free up time to pursue other life ambitions. Additionally, I had read for many years that you should start with the end in mind and have an exit strategy.”
Markewich wasn’t interested in selling to someone who hadn’t put blood, sweat and tears into the business already.
“If that new owner didn’t continue to operate in an open-book manner, the team would have exited, leaving the decades of hard work worth nothing,” Markewich says. “Offering equity was the best way to ensure that those who contributed to our success would be part of the long-term vision and share in the rewards of ownership.”
Similarly, Seneca Hull, president of Franz Witte Landscape Contracting, Inc., based in Nampa, Idaho, says they provide equity compensation to ensure the company lives beyond their founders. She says it also keeps people who have an entrepreneurial mindset but see the benefit of working with a team.
“There is no better alignment of the individual employee’s interests with the company’s long-term interests than equity ownership,” says J.T. Price, CEO of Landscape Workshop, based in Birmingham, Alabama.
Sun Valley Landscaping, based in Omaha, Nebraska, added equity compensation as a way to align incentives with those who have acted like partners in the business for years.
“We are playing the long game and want our employees to have an ownership mindset,” says Paul Fraynd, co-owner of Sun Valley. “What better way than to actually give them a piece of the upside? Research shows that offering equity is a powerful tool to boost loyalty and performance, and I’ve certainly seen that mindset shift in these employees.”
Fraynd adds that it also aligns with his belief that people take more accountability when they have ownership.
“In many ways, our strategy is similar to Verne Harnish’s thoughts on ‘PE yourself,’” Fraynd says. “Equity compensation is a common tool of PE roll-ups for good reason.”
McFarland argues that if you want to attract and retain talented leaders in a private equity-filled market, you need to offer non-salary benefits like a PE firm.
“Your competitors are using it to attract the talent that you’re both looking for, and if you don’t want to lose the people that you have who are running your show, then you should be considering it,” McFarland says.
Fraynd says equity can far exceed what he could afford to pay in straight salary.
“As a small business, we have to watch cash flow carefully, so I can’t simply double a salary for even my best people,” Fraynd says. “Equity compensation helps bridge that gap by offering non-cash value that can grow. Instead of just giving a raise (which affects our costs immediately every year), giving a slice of equity means the employees are essentially investing in the company alongside me.”
Price says he and his COO deliberately took below-market shares of the management pool so they could use the remaining shares to retain and attract high performers.
“We are going to win or lose with our talent and we use the equity pool as a weapon to attract and retain the best talent,” Price says.
Fraynd says with talented people, especially leaders, they are always being recruited. Offering equity is a way to attract top-tier talent and keep them long-term.
“By giving a stake in the company, we send the message: ‘We’re in this together for the long haul, and you’ll share in the rewards,’” Fraynd says. “That’s very appealing to high-caliber individuals who want to make an impact and dedicate their life to growing a business they are passionate about.”
Equity shares not only serve as a form of additional compensation but also boost ownership and accountability. Markewich says this asset encourages employees to think long term, as they are directly invested in the company’s success.
“By offering equity, we’ve seen a significant shift in how employees approach their roles,” Markewich says. “When you have a stake in the company, your actions and decisions feel more impactful. There’s an increased sense of responsibility, and the desire to see the company succeed is deeply personal. This shift has been critical in building a culture of ownership and accountability at all levels.”
Hull says once their new partners see they can make a difference in the organization, they become unstoppable.
“Employees who own a stake tend to act with the company’s best interest at heart, because now the company’s success (or failure) directly impacts them in real and tangible ways,” Fraynd says. “It raises their risks, which I find sharpens decision making.”
Who Should Receive Equity Compensation?
Deciding who should receive equity shares should be determined with careful consideration.
“Equity is something you do not offer to just anyone – it’s a special reward and responsibility,” Fraynd says.
Fraynd says as a small business, they have to be careful not to dilute the ownership too much or give equity to the wrong people.
“Equity in a small business is a finite pie – every slice you give out is a slice you can’t offer someone else later,” Fraynd says. “Any future equity offers will likely be reserved for those who are truly key to our company’s success over a long period (i.e., 10+ years). It’s also important to maintain some room for the unexpected; if we later want to hire a high-caliber person or complete an acquisition, we may need to have equity available to entice them.”
Hull says they are always looking for new additions to their ownership team and they discuss several times a year in their board meetings.
Fraynd says some of the traits he looks for include a dedication to longevity, championing their core values and an ability to produce exceptional results. Promising employees should be constant learners and role models to the team.
“It goes without saying, but this requires a special belief in the employee’s abilities and a high level of trust,” Fraynd says. “They have to be ready for this added pressure (and privilege) of being an owner.”
Markewich says they also seek individuals who embody their values, show consistent performance and take on responsibilities that help drive their vision forward.
“It’s about identifying team members who are not only great at what they do but who are also committed to the bigger picture,” Markewich says.
McFarland adds that only the top 10-15% of your payroll qualifies for equity compensation plans, according to Department of Labor rules.
“If any of the plans are characterized as deferred compensation, which the majority of equity comp is deferred comp, then they are, by law, limited to the top 10 to 15% of their team,” McFarland says. “I would suggest that you would only offer equity to the people who are driving value by leading teams, managing big relationships or bringing in accounts.”
Price agrees they focus on roles that make the biggest impact like the C suite, VPs, directors and general managers.
“We want folks to demonstrate a long-term commitment to the company and sustained high performance before we issue them equity,” Price says.
