Equity and equity based incentive compensation plans can be instrumental tools for a logistics company to becoming a high performing business and retain key employees. The types of incentive compensation plans vary and each can be customized to meet the goals and objectives of the employer. Growing a company’s business can begin with the simple step of selecting the most effective incentive plan for a company’s growth strategy and working with a financial benefits consultant to design the logistics to perfect the implementation and timeline accurately. One of the most important features to retain key employees and to promote growth is utilization of a carefully designed financial strategy tied to a vesting schedule in the plan that is beyond time based and rather focuses on company performance.
Business owners should not consider these to be giveaways to employees, but rather use this technique as a tool to drive high performance, which in turn leads to increased productivity. To successfully implement this strategy, it’s important to set goals through qualitative data that directly relates to increased profitability and cash flow. Some examples of commonly measured KPIs for logistics companies focus on setting clear and measurable goals with lead times, pick rates, on time in full deliveries, turn times, and customer claims. The list goes on, so it’s important to identify meaningful and impactful goals and tie them together so your team can see the incremental impact it can have on performance, and ultimately turn into incentive compensation. These KPIs, as well as many others, are a measurement of productivity that will lead the company to greater gross profits.
The following is an overview of the features of the most typical plans used to motivate employees to achieve stunning financial success for a company and help you to reach your revenue or productivity goals.
Non-Qualified Stock Options (NQSO) provide employees with the right to purchase a stated number of shares, with the price fixed at grant for a specific number of years. A plan is designed and drafted to meet the employer’s considerations for incentivizing and retaining the employees and allowing them to share in the company’s success as an equity owner. There is no taxation upon grant of an NQSO in the US if the price is equal to the fair market value at grant. When an employee exercises the stock option, the spread between the price at grant and the price upon exercise is taxable as ordinary income. The company will be entitled to deduct a corresponding amount as ordinary income. The future appreciation (or depreciation) in the value of the share price will be considered a capital gain (or loss) depending on the holding period.
Incentive Stock Options (ISO) allow the employee to defer the taxation upon exercise of the option until the date the underlying shares are sold. At disposition, when the shares are sold, the amount from the price at grant to the price upon sale is taxable at capital gains rates rather than at ordinary income tax rates. In order to take advantage of this special tax treatment, the employee must be granted options from an ISO plan that complies with tax law requirements and hold the stock at least one year from the date of exercise and two years from the date the option was exercised.
Restricted Stock (RS) provides employees with the right to purchase shares at the fair market value, or may be provided to employees and subject to defined restrictions. A company can design specific corporate and individual performance goals that can be provided to trigger lapse of the restrictions. With RS, a company can decide whether or not to allow dividends to the grantee of the award. If an employee receives a grant of an RS, then within 30 days they may make an election under Section 83(b). If the election is made, the employee will be taxed currently on the value of the RS, but will receive capital gains treatment upon the later sale of the asset when the restrictions lapse. This is an attractive feature if the value of the RS is low at the time of grant. If the election is not made, then the full value of the RS, less any amount paid for the shares at grant, is taxed at ordinary income tax rates upon the lapse of the restrictions.
Restricted Share Units (RSU), although the name alludes to the grant of equity, do not actually grant employees shares. This incentive vehicle can be designed to be settled in shares or cash upon the lapse of the restrictions. The employee is taxed on the amount of the appreciation in the RSU from date of grant to date of vesting at ordinary income tax rates. If vesting is contingent on the employee achieving individual or corporate performance goals, that will help the company manage financial commitments in settling the award.
Share Appreciation Rights (SAR) and Phantom Shares are similar, as both provide a right to receive the increase in the value of a designated number of shares or other benchmark, which can be settled and paid in cash or stock. SARs and Phantom Shares are a form of deferred compensation that can be targeted to specific company goals. In a carefully designed incentive plan, without improvement in the company’s bottom line, there will likewise be no appreciation of the SARs or Phantom Shares.
Deferred Compensation and Incentive Bonus can both be designed with payment contingent on attaining performance criteria with minimal cost, if tied to company achieving desired financial results.
Key to Becoming a High Performing Company
To reach a company’s financial goals, it is useful to consider that one of the most valuable assets in attaining stunning corporate results is your human capital. Knowing how to tap that resource to be in sync with the company’s financial objectives and timeline can be daunting unless the correct incentive plans are in place. If a company has not implemented an incentive plan, or has a plan but it isn’t achieving the desired outcome, it may be time to revisit plan type and design. Putting in place a program that ensures all of the company’s assets are working in sync with high performing logistics to take a company on the road to success could be the most important next step.