Stock markets fluctuate for better or worse. The value of any company’s shares can change based on supply, demand, and financial health. External factors such as inflation, interest rates, war, and policy changes can also create volatility. 

This isn’t breaking news, and it isn’t uncommon. However, a unique combination of circumstances has made this a particular topic of interest this year. In 2020, people worldwide experienced the economic impact of a widespread global event, and many witnessed a financial crisis for the first time.

Since 2020, the stock market has best been described as a rollercoaster. In the past 12-14 months, watching the divergence between trusted indices highlighting downward predictions has been particularly interesting, while companies like Nvidia and Meta have seen share prices rise astronomically.

People without a particular interest in finance have also become more involved in stock market fluctuations thanks to an increasing number of companies offering employees stock options. After the pandemic, companies needed to attract talent in a candidate-driven market after mass layoffs caused the US unemployment rate to peak for the first time since 1948. To attract candidates while engaging and motivating existing employees, public companies use equity to increase the competitiveness of their compensation offer and motivate their teams with a common goal and incentive. 

Now, these companies face a new challenge: navigating employee equity in a volatile stock market. When share prices drop, new hire and refresher grants suddenly become much less attractive, and if they issue a higher number of shares in an attempt to rectify this, they’ll exhaust their reserves. Furthermore, employees currently incentivised by unvested stock options may be tempted to explore new job opportunities as they watch their upside potential fall. 

In this collaborative article written by Spela Prijon at EquityPeople, we’ll share data from the team at Ravio as well as expert opinions from Christoffer Herheim at Optio Incentives and Andy Quayle at CMS. We’ll discuss a variety of strategies that can help public companies manage their employee equity offering in a volatile market. We will also share advice towards effectively communicating these changes to employees without negatively impacting engagement and retention. 

How to manage new hire and refresher grants in a volatile market.

“Companies should be prepared to intervene if they find themselves in the position that their share plans do not deliver the right incentives to employees. This can be particularly frustrating where underlying corporate performance is strong but a company’s share price has been impacted by external market forces.”  - Andy Quayle, CMS

Six key strategies could help mitigate the impact of stock market volatility on your employee equity scheme. These are particularly helpful to attract new talent, retain existing employees, and keep team members engaged and incentivised fairly.

1. Repricing options. 

You could reduce the exercise price of new hire and refresher stock options to reflect the current market value.

“Re-basing existing awards can be controversial with shareholders who will have suffered from a falling share price too, but is sometimes necessary.” - Andy Quayle, CMS

2. Price averaging.

You could calculate new hire and refresher grants based on an average stock price (e.g. over the last 90 days).

3. Exchanging options.

You could avoid underwater stock options by allowing employees to exchange them for another form of equity. 

“RSUs offer a more stable form of award than share options and are less susceptible to the adverse effects of share price movements. Options, by their nature, reward share price growth above a fixed strike price. Often, companies will look to rebalance poorly-performing awards with further grants that are designed to retain employees and incentivise future performance. In more extreme circumstances, companies can even consider valuation creation plans that reward the achievement of company-focused performance metrics and which are less dependent on share price.” - Andy Quayle, CMS

4. Offering buyback options. 

Instead of offering additional grants to top performers, you could temporarily swap performance-based grants for cash bonuses. 

“More and more companies are looking at ‘key man risk’ and making sure to have their key employees properly incentivised and motivated. These people will take charge on getting through the tough times so it’s important that they’re motivated and retained.” - Christoffer Herheim, Optio Incentives

5. Staggering grants.

Rather than annual grants, you could spread granting over multiple issuing dates (e.g. January and July) to diversify the share price at the time of granting. 

“Regular grants of smaller awards is a good way to smooth out the impact of share price volatility and ensure that employees are rewarded for long-term share price growth.” - Andy Quayle, CMS

6. Reducing equity participation.

You could reassess your current equity offering and establish new guidelines for which employees are eligible for stock options. This strategy should only be used after you’ve evaluated the potential impact of changes on pay equity, employee satisfaction, and retention. 

“People are people regardless of how well they perform. If they are getting used to something, and you remove this, it’s of high risk. This risk needs to be assessed and evaluated up front to consider whether you need to mitigate this or not.” - Christoffer Herheim, Optio Incentives

How to choose the most suitable strategy. 

No two businesses are identical, so the most suitable and effective strategy will depend on your unique organisational structure, equity philosophy, and culture. 

To make decision-making easier, we would recommend asking yourself three questions:

1. What is your overall compensation philosophy?

Your compensation philosophy should shape all decisions you make related to compensation, informing which strategy might be best for managing equity in a volatile market.

Perhaps you target the 50th percentile for overall compensation mix, but stock market volatility means your previous new hire equity offers are far above that target percentile. What's the best approach to bring your equity offers back in line with your compensation philosophy? Do you move the cash or the equity piece? 

2. What are you trying to achieve by offering equity? 

Suppose you primarily offer equity to improve your ability to attract, hire, and retain employees. Will a difficult economic environment negatively impact employee turnover regardless of any changes you make to your options scheme? Will you need to restructure your team and make redundancies? Is it necessary to worry about new hire grants if hiring has been put on hold indefinitely?

If equity is used as a tool to motivate senior leaders and top performers, could removing or altering performance-based and refresher grants damage their satisfaction and loyalty more than the effects of a volatile market?

3. How will internal pay equity be impacted?

If the value of shares has drastically changed, this could significantly impact internal pay equity. For example, a new hire with a grant valued and issued during a market dip could have a very different total compensation package from their counterpart who joined six months prior.

4. Is it truly necessary to react?

The stock market naturally fluctuates, so be careful and avoid overreacting to short-term changes that have little impact on the long-term value of employee equity grants. 

“It should also be remembered that share price volatility does not always result in a negative outcome for employees; companies need to be equally concerned about undue enrichment with a rising share price and should have the ability to cap rewards that do not reflect underlying financial performance.” - Andy Quayle, CMS

Making changes to your equity scheme will have a significant and irreversible impact on company culture. So, ensure you’re making changes for the right reasons and have exhausted other options.

How to effectively communicate changes to employees.

Once you’ve determined that it’s necessary to adjust your equity scheme to counter stock market volatility, the next challenge is to deliver the news to employees without losing their trust, engagement, or support. To do so, ensure all communication is clear, honest, and transparent. 

“If you are making changes, communication is key and you can almost not be too well prepared when it comes to communication. Explain why, adapt your language to the target group, and repeat the message frequently.” - Christoffer Herheim, Optio Incentives

“As is always the case, regular employee engagement and providing clear explanations for decisions is critical. After all, changes in share price is part of share ownership and taking a longer-term view is to be encouraged.” - Andy Quayle, CMS

“For growing companies that are more risk averse, it is very important to communicate safety and the long-term plans to avoid candidates being attracted by more mature companies with less perceived risk.” - Christoffer Herheim, Optio Incentives

Before taking action, our advice is to first identify whether there’s a realistic chance of returning to the same share value or growth trajectory. Your answer to this question should shape your approach to communicating changes with employees.

If your share price is likely to bounce back:

1. Educate employees about stock market fluctuations. 

Reassure them that a short-term dip in value doesn’t necessarily mean it won’t return, and shed light on some possible causes for the volatility. If internal factors have caused fluctuation, give them insight into your actions to boost the chances of a positive return. If external factors are at play, share examples of how similar circumstances have impacted the stock market in the past.

2. Reiterate the philosophy behind your equity offering. 

Remind employees that you’re all shareholders, so you’re all in the same boat (or, rather, on the same rollercoaster!). Company performance and external market factors impact everyone in the business, so collectively, everyone can strive to increase the chances of a good return.

Make sure that employees understand that they aren’t the only ones impacted. Be transparent about how different groups of people (e.g. early joiners who are still “in the money”, new joiners, and those who are now “underwater”) have been affected. This will help to minimise any misinformation that may spread if one employee hears that another has been seemingly unaffected by changes that supposedly impacted everyone. 

3. Offer access to your leadership team.

Run additional engagement check-ins and/or Q&A sessions with the leadership team so employees can easily ask questions about their equity program, potential changes, and the path ahead without fear of judgment. 

4. Remind hiring teams to advertise accurately. 

Whether hiring in a volatile or stable market, your recruiters, hiring managers, onboarding team, and leadership team should always ensure that new hires and employees understand the dynamic nature of equity. There is a tendency to view total compensation as a static figure, but fluctuations become more manageable from a psychological perspective when equity is accurately advertised as a volatile award.

If your share price is unlikely to bounce back:

1. Clearly spell out and detail the changes you’ve made to your equity programme.

If you’ve changed any numbers, explain which ones have been changed and why it’s been done. If you’ve changed your terms to mitigate any negative effects on employees, explain what’s been done and how it will benefit them. Also, don’t be afraid to inform employees about the solutions you didn’t use. Walk them through your thought process, highlight which options were on the table, and pinpoint the steps you took to reach a final decision.

2. Minimise employee confusion and dissatisfaction as much as possible.

You may understand why you’re making these changes, but most employees won’t. After receiving bad news, it can be easy to assume that the leadership team formed a conclusion based on prioritising business growth over employee happiness.

The easiest way to counter this is to show employees the alternatives and give them the power to run comparisons themselves. Ravio offers a wealth of equity benchmarking data that can be used to educate employees about how their revised package fares against other employers. By positioning yourself as a reliable source of benchmarking information, you can reduce the chances of employees taking matters into their own hands, researching equity packages offered by other companies, and potentially moving elsewhere.

For example, if you’ve reduced the amount of equity allocated to new junior hires in the Netherlands, you could use Ravio’s data to reassure impacted employees that 34% of tech companies do not offer equity to any employees and just 26% offer equity to all employees. So, although their allocation has been adjusted in response to market conditions, they will still receive a more favourable offer than they’re likely to elsewhere. 

3. Create separate communication channels with severely impacted groups.

This allows you to explain your thought process, potential solutions, and plan of action in specific detail to severely impacted employees. Although they will likely be disappointed by the news, they will appreciate your thoughtful approach. This method also avoids dragging other groups of employees into a negative headspace.

4. Consider new initiatives to regain confidence and support.

Reflect internally and discuss whether you could introduce or elevate a company value to restore employee confidence in your company and leadership team. For example, you could commit to an extra level of transparency by sharing internal metrics and market conditions.

Conclusion

As a public company with an employee equity scheme, there is no way to avoid the impact of stock market volatility altogether. With careful planning, it is possible to structure an award programme that mitigates the negative effects of fluctuations. But, more often than not, market volatility leads to public companies altering their options schemes when share prices are unlikely to bounce back and proposed changes are less detrimental to employee attraction, engagement, and retention than the impact of a falling stock price.

Check out Ravio’s resources to explore equity benchmarking data or read a complete guide to employee equity schemes. If you’d like to build a new equity scheme, assess or adapt your existing scheme, or gain tailored advice about market volatility from an equity expert, the team at EquityPeople is well-placed to support you.