While several factors influence the structure and scope of equity plans, benchmarking stands out as a pivotal tool to gauge your position in the industry relative to peers. It offers a strategic lens through which you can evaluate where your organization stands vis-a-vis industry counterparts.
In a landscape where businesses increasingly vie for the best talent, understanding one’s standing is crucial. While equity is just one piece of the compensation puzzle, it is often the most difficult to get correct. Benchmarking your equity plan provides crucial insights into fast-changing market trends and peer strategies, allowing you to make informed equity strategy decisions.
Let’s take a closer look at why benchmarking matters, some of the most common benchmarking positions, and how to think about benchmarking for your own organization.
Why Benchmarking Matters
Regularly reviewing and recalibrating equity strategies isn’t just a best practice—it’s a necessity. Factors like share availability, market dynamics, and organizational turnover can all necessitate adjustments in your equity approach. A consistent high turnover, for instance, might be signaling that your equity offerings aren’t competitive enough.
Benchmarking forms the cornerstone of such reviews. This data, which outlines how peer organizations are structuring their equity offers, becomes the touchstone for making adjustments.
However, equity is just one facet of total compensation. So while benchmarking is crucial, it must be viewed in the context of other compensation components, such as base salary, short-term incentives, and benefits.
The ultimate objective? Ensuring every piece of the compensation package operates in tandem.
With that in mind, let’s take a closer look at the three most common benchmarking positions:
Understanding Benchmarking Positions
1. Granting at Market Median
Choosing a median-based strategy, companies aim to grant equity in alignment with the industry’s middle-ground, positioning themselves at the 50th percentile. In this scenario, they’re wedged right between those granting less and those granting more.
By opting for this strategy, businesses hope to achieve a balance between offering competitive packages and managing their equity reserves efficiently. However, as much as this approach provides stability, it doesn’t necessarily stand out in a competitive market.
- Pros: Stays competitive, maintaining parity with industry standards.
- Cons: May not be sufficient to retain top talent, especially when they’re wooed by higher granters.
2. Granting Above the Market
In this approach, companies grant at a rate higher than a significant majority, typically at the 60th or 75th percentile. This strategy is often employed by companies seeking to differentiate themselves, especially in industries with specialized talent needs.
Companies in sectors like tech which demand niche or elusive expertise frequently adopt a market-leading stance to attract and retain the essential talent vital for their successful operations. However, this strategy also requires having a sufficient share pool, which is not something all companies have.
- Pros: Draws attention from potential hires and can enhance productivity and loyalty among current staff.
- Cons: Demands a robust share reserve, which might be a stretch for some companies. Difficult to transition to a lower percentile in the future.
3. Granting Below the Market
Adopting a more conservative approach, companies choosing this strategy grant equity at rates lower than the majority, often anchoring themselves around the 25th percentile. In essence, such companies are granting more than only one-fourth of their industry peers.
This strategy might be born out of necessity, especially for startups or companies with limited share resources. It’s a way to manage and prolong available equity without overcommitting.
- Pros: Can be a sustainable approach for companies with limited share reserves.
- Cons: Potentially challenging in attracting top-tier talent and retaining trained staff who might be tempted by competitors offering more.
Different Benchmarking Strategies for Different Companies
Unfortunately, there is no simple, “best” benchmarking strategy. This is because the benchmarking strategy that works for one organization might not necessarily align with the goals of another.
To show you what we mean, it might be helpful to look at how different types of companies might approach benchmarking their equity plans:
1. Tech Startups
Many startups, especially in the tech sector, might choose Granting Above the Market.
Given the fierce competition for tech talent and the need to incentivize employees in the absence of immediate high salaries, offering a larger equity stake can attract top-tier talent and motivate them to drive the company to success.
2. Established Family-Owned Businesses
For these companies, where company culture, loyalty, and long-term commitment are often paramount, Granting at Market Median might be the most appropriate.
Offering competitive equity grants, they can ensure that they neither overextend nor fall short in retaining loyal employees and attracting new talent.
3. Non-Profit Organizations
A non-profit, focused more on its mission than generating profits, might choose Granting Below the Market. Their main draw for employees often isn’t financial incentives but the cause they’re working for.
However, some equity or similar incentives can still be offered as a token of appreciation and commitment, without competing aggressively in the equity market.
What’s Right for Your Company?
Equity benchmarking isn’t a one-size-fits-all exercise. The position you choose—be it at the market, above, or below—should reflect your company’s unique mission, challenges, and goals.
As always, Infinite Equity is here to guide you through the nuances of this crucial process, ensuring that your equity strategy remains both competitive and aligned with your overarching vision.