Big tech companies and well-funded startups have long used lucrative salary and equity packages to attract and retain top talent. How can agencies like yours hope to compete against companies with such deep pockets?
You don’t necessarily need more cash to compete. You just need more flexibility and ingenuity in how you reward your highest performing people. To that end, you can make your agency’s compensation packages more attractive with more innovative approaches to incentives, including equity-like bonuses.
Let’s explore ways you can consider structuring incentives that are more likely to attract desirable job candidates, inspire them to accept your offer, and motivate them to stick with your agency for the long haul.
Stock Options Aren’t the Only Option
Many prospective employees want to know there’s something bigger to work for beyond their base salary.
While stock options work well for unprofitable product companies structured as traditional C‑corps, most agencies are not going to find them to be a useful tool. However, you can offer other incentives that make employees feel like they truly have a vested interest. From the outset, you need to show them they have a stake in your company, and if they perform at a certain level, they can share in its success.
Those incentives can take several forms, including:
annual or quarterly bonuses tied to profits
actual equity ownership with dividend payments
“phantom” equity ownership in a pool or as a function of profit
We will explore each of these in greater depth, but the key is to show candidates how they will be rewarded if they join your agency, contribute to its success, and, if they stay long enough, enjoy a portion of the upside.
Tie Bonuses to Profits to Promote an Ownership Culture
What better way to encourage profitability than with a bonus plan to share a portion of your profits?
A bonus plan can be tied to your agency’s profits on a quarterly or annual basis with a portion of those profits going to eligible employees. More senior or higher-ranking employees may see a larger share while more junior or newer employees might get a smaller percentage.
If you opt for this incentive, remember that while profit-derived bonuses can create a culture of ownership, they’re only effective if ownership or the management team provides enough transparency around how they’re structured. Employees need to understand what affects your firm’s profitability and how they can contribute solutions to maximize profits.
Two Approaches to Offering Equity Ownership
There are two distinct types of equity incentive packages agency owners can consider: a real equity stake or a so-called “phantom” equity package. Here’s how they work and how they compare.
1. Real Equity Ownership
Actual ownership is perhaps the most powerful incentive you can offer your employees. Being an equity owner or partner means employees typically share in decisions and profits commensurate with their ownership share.
In the event you sell your agency, an equity owner would also typically be entitled to receive a corresponding portion of the proceeds from that sale.
2. “Phantom” Equity Ownership
Agencies can also deploy an equity-like incentive package that doesn’t equate to an actual ownership stake. Sometimes called “phantom” equity, it functions similarly, from an economic perspective, to real equity but with some key differences. Essentially, a holder of phantom equity can receive one or both of two types of economic incentives: (1) an annual (or quarterly) bonus tied to the profitability of the agency; and (2) the potential for a more significant bonus tied to an acquisition of the agency.
The key differences between phantom and *real* equity are: (a) no voting rights; and (b) payments are taxed as ordinary income (like salaries or other bonuses) and do not have the potential for more favorable capital gains tax treatment.
Tax Considerations Can Vary Across Incentive Packages
Tax considerations can, and often do, become the tail wagging the dog in structuring equity and equity-like incentives. Depending on the structure of your agency (corporation, LLC or other) and the tax decisions you’ve made (whether you have made an s‑election, for example), there are various options and ways of dealing with these tax considerations. However, the bottom line is that equity (like a car for example) is a thing (a “security”) that has value and the value of that thing counts as income to the recipient, with corresponding tax obligations for the employer. (For LLCs taxed as partnerships – no s‑election – there is something called a “profits interest” that operates in effect like a stock option, but that is not available for corporations or LLCs who have taken the s‑election).
Phantom equity, on the other hand, has no value (assuming it is structured correctly) and the grant of the rights (which are contractual in nature, rather than being a “security” like equity); so, there is no tax consequences (again, assuming correct structure) unless and until actual bonus payments are made (in which case they are taxed like other bonuses, as ordinary income/compensation). These are complex considerations that need to be addressed at the outset of considering an employee incentive plan like those described in this article.
The Right Incentive Programs Create a Sense of Belonging
Not to get too touchy-feely here, but each of these incentive packages has a knock-on effect that goes beyond an employee’s pay stub.
Whether it’s profit-based bonuses, real equity or phantom equity, there’s an emotional component to participating in these incentive plans. You employees will be a part of something bigger than their individual job function.
The right incentives foster a team spirit and encourage a collaborative effort. Everyone is working toward a common goal that you all can savor if you achieve it.
Make Your Creative or Digital Agency More Attractive in a Crowded Job Market
The necessity for agencies to create better incentive packages is clear. Competition for talent will always be fierce. The right incentive programs can help your agency be a part of the conversation and maybe up for consideration.
The proliferation of remote work arrangements has also ratcheted up the stakes. Some workers are discovering they don’t need to live in the Bay Area to draw a Bay Area salary.
When your agency is vying for talent nationally, you need to put your best offer on the table. If you want to hear more about how Matchstick has helped firms like yours do just that, we’d love to hear from you.