Why US Firms Adopt Unified Equity Incentive Plans

In startups, founders often find themselves between a rock and a hard place. Cash is tight, yet hiring and keeping great people costs a pretty penny. The two challenges go hand in hand. If you spend all your money on these talents, you may run out of steam before the company even takes off.

In such a situation, a stock incentive plan is a life-saving option for founders. Instead of handing out cash, companies offer employees a slice of the company pie. This not only saves money but also ties employees’ success to the company’s future.

Once a founder decides to roll out a stock incentive plan, the next hurdle is choosing the right type of plan for the organization.

There are various types of plans available, each with its own pros and cons. Navigating this decision becomes significantly more intricate when the organization spans multiple jurisdictions with different legal and tax landscapes.

To deal with this situation, adoption of a unified plan is a suitable option for companies. It is the most practical and hassle-free way to give employees their due without getting lost in paperwork.

What is a unified equity incentive plan?

It is a single master plan that authorizes one pool of shares and supports multiple award types (e.g., ISOs, NSOs, RSUs, SARs), each with its own governing terms. This keeps governance centralized while making each grant compliant and administered in a manner that facilitates efficient and consistent implementation of the plan.

To provide a balanced perspective, let’s weigh the pros and cons of a unified equity incentive plan:

Pros of a Unified Equity Incentive Plan

1. Administrative simplicity and efficiency

By establishing a single “umbrella” equity incentive plan, companies streamline the process of granting different types of awards such as stock options, Restricted Stock Units (RSUs) and Stock Appreciation Rights (SARs). This simplifies governance, shareholder approval, and reporting requirements instead of managing multiple stand-alone plans with separate rules and authorizations.

2. Policy harmonization framework

A unified plan ensures all equity grants are within approved share limits and comply with relevant tax, accounting, and disclosure rules. It also reduces the risk of exceeding authorized share pools or violating regulatory caps.

3. Coverage of multiple geographies and jurisdictions

This single plan can be tailored for specific locations, employee types, and different regulatory requirements. This structure allows companies to customize awards as necessary while ensuring all grants fall within the primary plan’s legal framework and limits.

4. Cost efficient

Centralizing the program typically lowers duplicate legal and administrative spend and gives leadership a single view of dilution. 

5. Easy customization

It empowers companies to choose the type of stock incentive that best aligns with their employees’ financial goals, risk tolerance, and investment preferences.

Cons of a Unified Equity Incentive Plan

Like every coin has two sides, a unified equity incentive plan, while streamlining strategy, also introduces its own complexities. Companies must address both the general hurdles of equity plan rollout and the specific complications introduced by managing diverse plans under a single structure. The key challenges include:

1. Complexity in plan management

Managing an umbrella equity incentive plan is more complicated due to the inclusion of varying eligibility, vesting, and allocation rules for different sub-groups. This increases the likelihood of administrative errors and demands significant time and expertise to ensure compliance.

2. Employee communication gap

Managing communication and the rollout of stock options across various departments and locations can be tricky, often resulting in mixed messages or inconsistent understanding among employees. When information is not clear or aligned, it can breed doubt, misunderstandings, and lower participation in the program.

3. Slower decision-making

Amendments to the master plan will require specific authentication, and cross-border execution involving local legal review, payroll and tax setup, and participant communications can add steps that delay grants.

4. Complex valuations

Determining fair market value for shares across multiple entities under a single umbrella can be difficult, especially if sub-plans are tied to separate business units with different performance metrics.

Unified reward culture example

ABC Inc., a fast-growing US-incorporated technology firm, has its workforce and consultant base across the United States, India, Europe, and South Africa.

To build a unified team spirit and offer fair rewards globally, ABC Inc. faced a key question:

How can we offer equity incentives to employees and consultants in different countries, given varying legal and tax regimes?

The solution: a single, smartly designed umbrella equity incentive plan with sub-plans tailored for each region.

To keep things simple for the business and fair for every participant, ABC Inc. decided to adopt one master equity incentive plan, also known as an umbrella plan. This creates a single policy framework that allows different sub-plans under its roof.

With its unified equity incentive plan, ABC Inc. has turned the complexity of global equity into a powerful strategy for building loyalty, aligning interests across continents, and driving company success.

Wrapping up

A unified equity plan, such as a master equity incentive plan with sub-plans, can offer significant operational efficiency, centralized legal and compliance control, and the flexibility to deliver competitive equity compensation across global jurisdictions.

However, this umbrella structure also introduces added complexity, potential compliance risks, cost implications, and the challenge of maintaining employee morale if perceived inequities or rigid structures arise across diverse geographies and employee groups.

Striking the right balance between standardization and local adaptability is key to successful implementation.