Why Employees Stop Valuing Equity, With Comp Expert Dan Walter

00:00 Haris Ikram, CandorIQ
Chad and I are excited to bring in Dan Walter, a subject matter expert in all things equity and long-term incentives and how to think about it. This is going to be a meaty topic.

00:30 Chad Atwell, CandorIQ
I'm Chad Atwell, based out of Colorado. I lead customer success at CandorIQ with Haris, and I also provide advisory services to a lot of our customers. Many of our customers are standing up compensation tools for the very first time and haven't had access to market data or job architecture. My background is as a compensation consultant, so I've seen lots of different types of equity programs.

01:42 Dan Walter, Alliant Human Capital
I'm pretty excited to talk about this topic. My name is Dan Walter, I work at Alliant Human Capital. Some of you may know me from when we used to be called FutureSense, or when I had my own firm called Performensation, or from when I wrote 350 articles for the Compensation Cafe blog over a decade and a half. I pointed out to my son the other day that I've been doing this for 25 years, and he said, I thought you started in 1994, that's 31 years. Thanks for reminding me. My deepest and most passionate area of expertise is in better use of equity compensation.

03:11 Chad Atwell, CandorIQ
Over a year ago I started seeing research suggesting equity just didn't have the stickiness it used to with employees. There was a lot of perceived undervaluation. Cash is always king when we're talking about broad-based rewards, but for the most part we're seeing a lot of people who don't get the most out of the equity provided to them. It's provided for a purpose, to help them have an ownership stake in the success of the business. Dan, what are you seeing where employees don't seem to get that perceived level of value?

04:10 Dan Walter, Alliant Human Capital
The interesting challenge over the last several years, and honestly over a really long time, is that equity has not delivered for most people in the way their imagination tells them it should. There's a reality that people make millions of dollars from these things, and they see that most of them don't. So let's start with that: the reality is seldom what people's imaginations tell them reality should be.

05:51 Dan Walter, Alliant Human Capital
It's seldom get rich quick. I tell people, when you hear about these rock bands that are an overnight success, everybody in that band is 35 years old and they've been playing since they were 10. Overnight for you, because you've never heard of them before, but they have been playing together for decades. Equity was always about the long play. And not to give away the lead or anything, but an RSU is not a long play.

06:50 Dan Walter, Alliant Human Capital
Every once in a while it is, and that's when we see it in the news. Oh, these people started a company 18 months ago and they're all millionaires. That happens. The reason it made the news is that it doesn't happen very often. It's like the deer that befriends a bear. It's in the news because it doesn't happen very often. Usually the bear just eats the deer.

07:31 Dan Walter, Alliant Human Capital
I used to do a keynote about the history of equity compensation in Silicon Valley, when it started and why, the guys at Shockley and the guys at Fairchild and the guys at Intel. The whole purpose of what equity was supposed to be doing was, look, we're going to grow this amazing thing. We kind of aren't amazing right now. We can't pay you what IBM can pay you, we can't pay you what Amdahl pays you. But what we can do is give you a piece of what we get. So you're going to work your butt off, just like every other owner in the company does, and if this succeeds you're going to get paid like an owner. If you want to see real ownership, go to a nonprofit bingo game, because there's some CEO working to support their kid's football or theater team who will clean a toilet at the bingo game but won't clean the toilet in their own house. That's ownership with nothing that goes along with it. That's the whole concept you're trying to get from these programs. And they've become largely a commodity. You're not going to get that feeling of everybody having an oar, all rowing in the same direction, from a commodity.

09:12 Chad Atwell, CandorIQ
I intentionally used the phrase ownership culture, because it does need to be supported by an actual culture of ownership, distributed decision-making, giving people real authority and autonomy over the work. It's hard enough to get people rowing in the same direction when you don't have aligned performance metrics. So what's the definition of success to begin with for employees who have a nebulous idea of what equity is? The definition of success is you go public, you get to the IPO, or you increase the stock value by a certain percentage. But many don't have the information or education on how the business actually makes money, how it gets value out of their work, and how it becomes more valuable. People look at the end of that formula rather than investing in the first part of it.

10:26 Dan Walter, Alliant Human Capital
I love that you bring up the IPO. Equity doesn't ever create a sense of ownership. A sense of ownership creates value and equity. An IPO is like the Olympic trials, in the sense that the IPO is the starting point. If you're trying to get to the top of a mountain, the IPO is when you finally get to the bottom of the mountain. It's base camp at Everest. That's when it gets hard, because until then your value is what people imagine it's worth, and your competitors are other scrappy companies like you. Then suddenly maybe I'm worth 12 billion today and 4 billion tomorrow. That's where the fight comes in, and that's where you need the ownership culture. People hate the stat, but a few years ago I built a presentation for a client and we did the math: from IPO to that date, Amazon's stock price had gone up 117,000 percent post IPO. If you had pre-IPO equity in Amazon and you stayed, you'd be doing okay. Equity was always about the long play, investing your blood, sweat, tears, and time into a company in exchange for the company investing back in you. I think there are a lot of investors who don't believe in it, and a lot of CEOs much more concerned about creating generational wealth for themselves than actual wealth for their staff. When equity first became very popular, it was uncommon for a company to have more than 500 employees at IPO, and uncommon to have even a billion dollar valuation. Nobody was going to become a billionaire at IPO because the whole company wasn't worth a billion dollars. Now we see CEOs and CFOs becoming billionaires at IPO. I don't have a problem with people being billionaires, but when your value is a thousand million dollars, a million dollars doesn't seem like much. I've heard CEOs discount it: look, if we're not giving them at least 500,000, what's it even worth to them? Well, a house is worth all their debt to them. So there's that disconnect in what ownership means, what it means to win, and whether you win at IPO. I would argue you don't win at IPO.

14:46 Haris Ikram, CandorIQ
I have philosophical answers and tactical ones. I agree with a lot of what Dan said. Ownership is something you need to instill first. It's not that you get equity for ownership, it's that you instill ownership and equity is a reward for the work you put in to help get the business where it is. What's interesting from the 2000s is that with the era of Google and Meta, employees made so much equity, and that's not the same in all industries. In Silicon Valley, if people aren't getting a certain dollar amount in equity they'll pack up and go somewhere else. Silicon Valley has perpetuated a culture of turning equity into near immediate value, so a lot of employees think of it as a short to medium term game. Part of it is, how much do you fight the market? If you're hiring an AI engineer, it might be impossible to have any conversation whatsoever.

16:54 Dan Walter, Alliant Human Capital
Part of the hard part is everybody thinks they're that person. Somebody at OpenAI said Meta was trying to hire OpenAI engineers with 100 million dollar compensation packages. I don't know how much of that is hyperbole. There are some people who are invaluable, they're stars. Most people aren't those people. And there is the reality that some people are in it for the short run. People tell me equity is designed as a retention tool, and I always point out that the tech industry has the second worst retention of any industry, second only to fast food. So obviously it doesn't work as a retention tool. Let's stop even saying that. When you have RSUs, most of them only have a three to four year life and then they're gone. Is that your goal, a career of three years at a company? That was never the intention. I'd argue that if your goal is two to three years, give people money. Give them a midterm cash award and say, we're going to take the hit for this, it's going to be a liability, we're going to pay you if we make it. We're not going to dilute ourselves and we're not going to take anything away from the people who want to play the long game with us.

19:22 Haris Ikram, CandorIQ
Especially with Gen Z and the younger generation, there's a different expectation of work and relationship with work. The incentives are not like the 70s, 80s, 90s. So versus equity, something like a short-term incentive, a retention bonus, or a promotion bonus could be effective, and other perks and benefits could be interesting too. Do you let people work remotely two to three weeks a year? That can appeal to a whole group of people and drive longer term retention that equity might not, at least in tech.

20:22 Chad Atwell, CandorIQ
Have you seen situations where companies try to make it more flexible, where you choose equity if that's what you're inclined to want, or you select more flexibility instead? More of a consumer or employee driven mentality on how rewards get delivered?

20:47 Dan Walter, Alliant Human Capital
The poster child for choice programs is Netflix. The challenge people bring up is, do you have any idea how hard that is to communicate, people don't understand it. All I ever say is, do you understand the health care plan you just signed up for? I'm a pretty smart person, I've done this a very long time, and I still barely understand those things. Do you really know what the 401k choices you made are and how they actually work? We've created something over the last eight or nine years we call a hybrid incentive plan, which lets people, within a defined structure, convert short-term incentive to long-term incentive on an annual basis. We find that giving a bit more of a prescriptive nature helps. In a flat just-make-a-choice program, people don't know what choice to make, and if you're not going to spend the time to communicate, they won't work. But here's the secret: no equity works if people don't understand it. Eighty-five percent of people who have equity will tell you they don't understand it. So we suck at communication. It's an interesting paradox, the number of companies that don't want to communicate equity because they'd have to communicate that it could go up or down.

23:10 Chad Atwell, CandorIQ
There are so many twists and turns that can happen, and that's where a lot of companies back away. They say, we can't tell you with 100 percent certainty where this is going to go, so maybe we just don't communicate and let employees figure it out. That's why we end up where we are, with employees feeling much safer with cash, because of cost of living and inflation. And you do get to the point where certain employees have enough cash and want to switch it out for equity. That's a great trade-off if you understand the risks going into it.

24:31 Haris Ikram, CandorIQ
Even if you don't have a choice equity program, even if you have a single program and you've documented how the equity works, we find that our customers' employees might still be confused. Even if the information is there, they don't all get it. So there are a couple of things companies can do. One is not to communicate once or once in a while. You have to communicate equity on a recurring basis. How often does an employee's equity vest and they come back asking about exercising, or about tax implications, which is a whole deeper rabbit hole. Organizations need to communicate constantly, starting from when someone is still a candidate: here's what your equity means, here's what it means for the company, here's how it aligns to company objectives over the next 12 to 24 months. The other thing we see in the companies who do this well is that they empower their managers to understand equity too. A lot of the time an individual contributor goes to their manager and the manager says, I don't know, go read this article or go talk to HR. If everything is bottlenecked by HR or finance or the total rewards team, people are shy. Even smart people say, I don't want to seem dumb in front of my peers, so I'm not going to ask. Democratizing this information is a key thing that the great organizations do well.

26:41 Chad Atwell, CandorIQ
Communicating beyond just the initial grant letter is the big thing. That's the start of the conversation, and it gets more complex from there, because you're not granting one time. You're going back year after year with refresh grants, somebody gets a promotion and gets additional, and then there's vesting stacked on top of the last one. How do you even model some of that? It gets very complex very quickly. And I've seen it time and again, employees go to their managers because that's the most immediate person, and the manager very likely doesn't have any more detail either.

28:02 Dan Walter, Alliant Human Capital
I had a client several years ago that did one of the coolest things I've seen. They created an equity mentorship program. They had mentors for managers and mentors for employees, people who did understand equity, who took the time, who got it, and were willing to hold office hours. Not from a here's-how-the-taxes-work angle, but here's how the company works, here's how value gets created, here's your four grants, granted this year and this year at this strike and this strike, here's what's vested. It was really interesting how much people appreciated just having a person explain it to them. We think technology is going to solve this. Technology will allow us to solve it, but by itself it won't, because it's still complicated and you still need people talking to people. Technology can do the communication, but people have to do the conversation. I work with a lot of ESOP companies, some 100 percent employee owned. The first time I went to an ESOP conference, you sit down at a table and there are seven people from one company: somebody who works on the assembly line, somebody in accounting, somebody in marketing. Employees learning about ownership at a conference. I thought, what a great idea, people should do this.

31:33 Dan Walter, Alliant Human Capital
Nobody really cares about the ingredients in a fast food burger. But when you spend 70 or 100 dollars on a meal, you want to know where the wine came from and what the chef was thinking. I honestly think we need to treat equity compensation, and really all awards, as things with real value. Here's what it is, here's the components, here's why it is what it is, here's what happens at an IPO, and here's why you may want to wait a very long time after the IPO. You can get out at 180 days, but do you really need to? The companies everybody here admires all do that. Every company where you say, I want to be like them, has a very different equity plan and communicates it. Name a company you really admire in this space and almost always they have good communication programs and a unique aspect to their equity program.

33:04 Chad Atwell, CandorIQ
You don't want to be the company where the employee doesn't look at their equity awards until they're negotiating their next job. Keep it in front of the employees. I'd also encourage anyone in this space to have a very defined purpose and goal behind what you're offering and why. We offer short-term incentives, long-term incentives, retirement plans, health care plans, all under the umbrella of a total rewards philosophy. But really it's a set of answers to, what are we intending to achieve through these programs? How do we increase employee experience? How do we make sure people feel rewarded and cared for? Those are things you can reiterate all the time as you push out communication.

34:36 Haris Ikram, CandorIQ
I think there's translucency at most companies. It's not completely opaque, but it's not completely transparent either. What I see companies doing well is communicating from the basics, what an RSU or a stock option is, through to the tax implications, and telling people they should also get external tax or legal advice. Companies that do a good job communicate the basics but repeat it continuously, so people can think about it in a timely way. There are so many examples where one week before hitting their cliff the employee comes and asks. That's canonical for someone who had no idea what equity meant, got an email from the cap table system saying this date is coming up, and now they're asking all the questions. Sometimes it creates fire drills. It's really about having that drum beat of constant communication.

36:23 Chad Atwell, CandorIQ
When someone brings you in for an equity design, or just to evaluate how they're doing, what are the success measures you point to?

36:45 Dan Walter, Alliant Human Capital
We always start with, what's your intention? And there are not a small percentage of companies where the intention is, we have to have equity. Then there's the large swath of Fortune 500 companies whose goal is to do what everybody else is doing. I refer to that as the invisible compensation philosophy: as long as we do what everyone else does, nobody can tell us we're doing it wrong. What if you're all doing it wrong? Then we sit down and ask, do your employees actually value this? One way to find out is to talk to your employees. Don't survey them, actually talk to people and ask, what does this mean to you, how does it work? The vast majority will say, I have no idea. The other thing we look at is, are people exercising their options? I dealt with a company recently, pre-IPO, worth billions, and on their entire executive team not one person had ever exercised a stock option. I asked why, because there are so many potential advantages to exercising early when the price is low. Finally somebody said, well, we get to keep our options after we leave, so why would I take the risk now. That's a strategy. But then you go back to the company and say, do you know you created this? Your retention program is the anti-retention program. The reason you gave this to people was so they wouldn't feel like they were going to get laid off, and what you've built is so much built-in value that everyone feels they can leave whenever a new employer wants to hire them. So one of the things we look at is how many people walk away from their vested equity, which is an astounding percentage. To the extent people walk away from vested equity, it means either they don't understand the potential future value, or your potential future value is a lie. When we see that, either your communication program is terrible or your employees do not value your equity. And the number of times I see rollout communications saying, imagine our stock price goes from 10 to 50. Okay, also pretty unlikely, not a lot of company stocks go up 5x in three years. What's your stock price right now? Well, it's at three, or it's at 86.

40:41 Dan Walter, Alliant Human Capital
So why are you going from 10 to 50? Well, it's easy math. But it's completely unrelatable. You say 10,000 shares, and nobody at your company has more than 400 shares. Why would you use 10,000 shares? The math is easy for who? It's not easy for them. The other piece we look at is your turnover rate. Is your average term of service 18 months among the people you most want to keep? If so, your equity isn't working. Almost every company still has a three to five year vesting schedule. The last piece is how many people have equity near the end of its life. That tells you how many people have been around a while, and how many might need to be reminded or forced to do a transaction before expiration. Most companies don't know that it now takes an average of 14 years to go public. You give somebody a 10 year grant life, which means their earliest grants will expire before your IPO date. And people go, now what do we do? You can't replace them. There's also been a movement over the last 10 years toward everybody getting a refresh grant after some period. We look at the value of people's existing equity and ask, why are you giving this person a refresh grant? Their current equity is worth 7 million dollars. The refresh grant has a projected upside value of 615,000. Is that the best use of your equity for someone who already has millions built in? Are you refreshing because everybody else does it, or with an intention in mind? I have yet to see a single piece of evidence that refresh grants retain, motivate, or engage people. They don't attract anybody, because you only get them if you've already been there a while. I've never seen one piece of evidence showing refresh grants do anything except dilute your equity pool.

43:51 Chad Atwell, CandorIQ
It comes down to the market telling us this is what everyone does, or maybe it's a symbolic thing. People are afraid of what happens if they don't give out the refresh grant. But your point is well taken. There are other things this employee might be looking for, and if we haven't actually asked them that question, we haven't gone to that level of detail with them.

44:36 Dan Walter, Alliant Human Capital
Equity has become oddly impersonal. You don't want to be treated as a cog, because you're going to treat the company the way they treated you. Why would I act like an owner, why would I invest any of my personal being into this, if they don't invest any of their personal being into talking to me? Years ago I worked at Nordstrom as a kid, and the CEO would walk around the store on a regular basis, twice a year at every store. I remember Mr. Jim Nordstrom coming by my department in Santa Clara, California, and the guy working with me told him how much he loved the Seahawks, because he was originally from Seattle. Mr. Jim said, well, we own the Seahawks, we've got box seats, if you're ever in Seattle just let them know. He literally wrote his name down and said your name will be on the list for all the games this season. He didn't need equity. He did go to Seattle, his name was on the list, and he watched a Seahawks game with the Nordstrom family. Could you give anybody in the compensation realm something that gave that experience? It's one of the coolest experiences of my career, and I didn't even experience it.

49:14 Haris Ikram, CandorIQ
One thing we haven't touched on is that finance and HR often think about equity in different ways and aren't perfectly aligned. Having a single unified view of what equity means for your company, regardless of which executive owns it, is really key. And thinking about equity as compensation, like cash. It may not be money in the bank immediately, but you are diluting your option pool and sometimes not achieving the goals you set. Equity is a finite resource, not an infinite one. If anything it's more restrictive than cash, because you can make more cash but you can't easily expand your option pool. So treat it as such, model it out, and think about hiring and reorgs and risks all tied to the equity that's available.

49:49 Chad Atwell, CandorIQ
I think we have to leave it there. Really great topic. Make sure you look Dan up on LinkedIn, he's out there talking about these topics all the time. And both Haris and I at CandorIQ would love to hear from anybody interested in the tools we offer in this space.