Equity Unpacked: The Stock Plan Administrator's Podcast

The Participant Mindset

Episode Summary

From Schwab, a new podcast specifically for plan administrators that makes sense of all things stock plan management.

Episode Notes

What do employees really think about equity compensation? Host Amy Reback, VP of Stock Plan Services, speaks with Lilah Raynor from Logica Research to unpack the data from this year’s participant survey and explore the ways COVID has impacted how people are (and aren’t) investing.  

Equity Unpacked is an original podcast from Charles Schwab. 

Important Disclosures:

The comments, views, and opinions expressed in the presentation are those of the speakers and do not necessarily represent the views of Charles Schwab. (0623-3AES) 

Episode Transcription

AMY: From Charles Schwab Stock Plan Services, this is Equity Unpacked—a podcast dedicated to simplifying the complicated world of equity compensation.

I’m Amy Reback, and for the last few years, I’ve spent at least a portion of every day searching for a source of simplicity within an otherwise notoriously complex profession.

While technical, detailed sources abound, simplicity and even suggestions on where to learn more about current trends are scarce.

I’ve scoured websites, had endless discussions with plan administrators, accountants, participants—both experienced and novice—in an effort to uncover a digestible source of information to navigate hot topics and themes within the stock plan world. 

When was the last time you looked beyond the details to take in a broader perspective? And how do you know if you're even asking the right questions?

In Equity Unpacked, we examine emerging themes in managing equity comp. From administrators to participants, this is your moment of equity zen. 

In our inaugural episode today (very exciting), we will focus on participants—how they feel, what they want from their stock awards, and the role they want their employers to take. 

After all, the core purpose of equity compensation, or stock awards, is to retain and attract top talent. In other words, participants are the reason equity compensation exists to begin with. So, we figured they’re a great place to start.

For the last four years, Charles Schwab has commissioned Logica Research to produce a stock plan participant study to examine the mindset of employee participants.

How do they view this type of compensation? What do they use it for? Are they confident in making those decisions? And in 2020—wait for it, you knew this was coming—how has the unrelenting reality of COVID-19 influenced how they feel and the decisions they make?

My guest today is Lilah Raynor, CEO of Logica Research, and our goal is to unpack the Schwab Stock Plan Participant Study for 2020.

Lilah, thanks for joining us today. 

LILAH: I’m so happy to be here, Amy, thank you for having me. 

AMY: Now, Lilah, Schwab and Logica have produced this study for a few years now. And, as with any study, one would assume that over time certain trends would emerge—and then… 2020 happened.

Now, I’ll ask you to forgive me ahead of time for using "normal" and "2020" so close together in the same sentence—but, under normal circumstances, we know employers use equity comp as a means to attract and retain talent.

One of the data points that stood out in the 2020 study is that 57% of respondents—who are all stock plan participants—would prefer to stay with their employer specifically due to COVID. Let’s think about that from a “retain and attract talent” perspective.

Clearly, it’s harder to attract employees if they’re less willing to change employers—but employee retention, on the other hand, has become automatically easier due to COVID.

So, if we look at that through an equity compensation lens, the longer an employee participant stays with their employer, the more they’ll benefit from their stock awards. Their awards have a chance to vest, they may even receive additional grants as well, but 57% staying put—I’m curious how this might influence participant behavior. 

So, Lilah—are you ready to unpack? I’m wondering if participants are simply seeking security, or are they waiting for shares to vest? Is there a greater need for income? Walk us through the data from the study.

LILAH: Yeah, Amy, all great points and great questions. We have seen over the years in conducting the study for Schwab on equity compensation that equity comp does play a key role in choosing an employer. 

So absolutely, under normal circumstances, that is true as well—but yes, of course this is a totally different kind of year, and so we’re seeing a few things going on, and you hit on a number of them. There really are a mix of reasons. 

It’s a time of uncertainty, and staying with an employer helps limit or mitigate uncertainty for people, by not switching jobs. It’s also a time of waiting, and waiting for shares to vest.

And then, also, there is a sentiment right now that we're seeing in our research around employee engagement. For a lot of people, employee satisfaction is actually up due to COVID. And we’re seeing that there can be increased employee engagement based on how employers have handled this challenging time. Part of it can be just increased employee engagement right now. 

In addition to reasons for staying, we’ve seen that between 2019 and 2020, the likelihood of employees choosing to work for a company because of equity comp went up significantly, as well. It was already high at 87%, and it went up to 90%. We also saw that equity compensation went up as a main reason to take the job and that this was especially true for millennials.

AMY: So I see the importance of equity comp as part of that decision-making process increased pretty significantly, as well—and then when you add COVID to the mix and the multitude of difficulties that go with it, you factor all of that in, and participants are choosing to stay with their existing employer longer, so they do benefit more from those employee equity plans. And then, if they’re faced with that “should I stay or should I go” decision, their awards are worth more, the stakes are higher, and that decision becomes even more difficult.

Now, on the flip side, it makes it significantly more expensive for employers to attract new talent, as they may need to offer higher amounts of equity to prospective employees to lure them away—and it sounds like great news for stock plan participants, but it also means employers may have to step up their equity game to compete for talent.

Lilah, in the 2020 participant study, we also saw that 39% of respondents feel they’re more likely to need financial advice due to COVID.

Let’s unpack it—what kind of advice are they looking for? Is this a new trend?

LILAH: Yeah, it’s so interesting. We have seen in our research that now is a time when people are more open than ever to talking about money, and they are really looking for advice.

The type of advice they need can depend on their financial situation.

So, people have been looking for financial advice for a long time, of course, but it’s especially true right now. And you have a range of people needing help moving from spending to saving on one end of the spectrum, so they need help with debt management and budgeting. 

And when we have conducted interviews with people in the past on how they use their money from their stock plan, we found that it could be used for basic needs such as paying down debt and basic budgeting needs.

Then they also want to know how to use their equity compensation to help them do these things.

And then when you look at the other end of the spectrum for more affluent and more highly compensated employees, they need help and advice to plan for the longer term and to look at some of the more complex aspects of their financial situation.

So, what we see in our study among stock plan participants is that employees need help with a range of financial advice—from budgeting, debt management, to investment advice, to retirement planning. So, that full range. 

AMY: So what I’m hearing is there’s a range of needs here. And that’s normal, don’t you think? I mean, financial concerns in your twenties are super different than they are in your thirties and forties.

And hopefully, as people mature and they save and invest, they have more choices in how they spend or use their money, right? So, the overall theme here is participants need help understanding the best way to use their equity compensation at just about every stage of their financial life. Do you agree?

LILAH: Yes, absolutely. 

AMY: So, these are big decisions. It sounds like these are the type of big life decisions that could induce a lot of anxiety, mostly because it’s really hard to ask for help, especially with financial matters. But it can also be even harder to commit to a long-term strategy for anything in 2020. 

What can employers or plan sponsors recommend, and what can participants do to mitigate this type of stress or apprehension about their finances?

LILAH: You know, knowledge is power and really helps alleviate anxiety and fears in general.

This is certainly true for finances, as well. And we’ve actually seen that confidence in making decisions on equity compensation has gone up in the last year. 

Our hypothesis as to why this is happening is that there is more information and education available and that people are educating themselves, which really makes them feel more confident.

Equity compensation is one part of this financial picture.

There are more communications from employers and from other people in an employee’s network—and with this is a need for education and how best to use equity compensation and when. 

Our research revealed that the majority, 85% of employees, agree that they would like their employer to provide more education to help them understand their equity compensation. So there's really an opportunity here for employers to provide education and help in planning, and help alleviate that anxiety. 

One of the things that we see in our study is that confidence in decisions is higher for those with an advisor.

Getting education and advice is super important. And, going back to that earlier part of our conversation, people are open for that advice and asking for it more now because of COVID.

We see in our stock plan participant study that 30% of people exercise or sell as part of their long-term plan.

AMY: You know, Lilah,I love that you said “knowledge is power." That just sums up everything in 2020, doesn’t it? We could use that as a simple way to answer nearly every question relevant to this year—"What should you know about COVID?" "Knowledge is power." "What should you know about the election cycle?" "Knowledge is power." "Where do I find household paper products these days?" "Knowledge is power." And, of course, closest to our hearts—"What should you do with your stock awards?" And knowledge is definitely power there.

So, Lilah, let’s turn to another standout statistic from the study, and this one is particularly interesting because it’s specific to the millennial generation:

Why should we pay attention to millennials? Well, two reasons. The first is they represent the largest percentage of employees in the workforce today, and, also, they have a lot more energy than those of us from Gen X.

I mean, Gen X, love you, mean it—'80s music always gonna rule—but let’s face it, we are outnumbered here. So, the more effort we put into understanding millennials, the happier everyone will be.

Besides, millennials are fun and they teach us how to do really cool things with our phones—so perk up, Gen X. Lilah’s about to unpack how all of this is different for our millenial friends.

Here's the stat: the study reports that 27% of millennials are more likely to exercise or sell equity compensation due to financial stress versus 13% for older generations.

Now, Lilah, we already know financial stress reaches everyone—so why is this so unique, or more prevalent, for millennials?

LILAH: Millennials have had a lot of financial challenges as they’ve gone through their lives. They entered the job market at a challenging time, they were hit by the great recession, and then manage the stages of careers, families, homes, and retirement planning. 

They came of age during the last recession, many with a lot of college debt, and then—COVID.

COVID is hitting millennials hard, with younger ones not as established in their careers so their jobs are more vulnerable, and older ones with more financial responsibility—while at the same time they’re having job security issues, and they’re taking care of kids and working at home with kids at home.

So of course it’s understandable that stress is high for millennials due to COVID, and they’re going to need a lot of help.

But what we also see is that millennials are engaged in their finances.

In our study among stock plan participants, we see that they may rely more heavily on company stock as part of their portfolio and assets. So they’re going to need extra help understanding how to manage this, how to manage their equity compensation, and how to diversify, and how to plan. 

And we see that in other research as well, too. 

AMY: You mention "plan"—let's go back to long-term planning for a second. The study also indicates that 5 in 10 (or 50%) of participants, overall, use or intend to use their equity comp as a means to supplement their retirement savings.

Now, most millennials are just starting to think about retirement as a reality—but as a card-carrying member of Gen X, retirement has been top-of-mind for a while over here.

What does it mean if 50% of participants are using their stock awards to support their retirement? Are we all grown up now? Are participants embracing long-term planning here?

LILAH: Yeah, it’s a really great question, and you raise a good point. You know, this really goes back to that idea that we seem to be at an inflection point right now in terms of how people are engaging with their finances.

They are engaged—and I’d say that in the 25 years that I’ve been doing this research on people’s attitudes toward money, they are more engaged than I’ve ever seen before.

And, we see that show up in different ways. 

One example is we know people are spending less and saving more on average right now. 

Those people who have the income, who have the abilility to save—they are. And we see that people are looking for ways to make the most of their money, and to make it work for them.

This includes their retirement accounts and their equity compensation programs.

So, we are seeing that people are increasing their contributions as well as rebalancing their accounts. 

One finding this relates to is that about 1 in 5 people anticipate delaying their retirement, so the increased contributions are a way to help address that. 

AMY: So, if 1 in 5 (or 20%) of participants are delaying retirement and staying in the workforce longer, they likely continue to earn more equity awards, which contributes even more to that retirement fund.

Lilah, you’ve really helped us to unpack what’s happening in the hearts and minds of participants today—so let’s see if we can sum it up. 

First, thanks to COVID, more than half of participants prefer to stay with their existing employer, which allows them to gain more benefit from their stock awards and also reduce some uncertainty of a new job. But that also makes it harder for new employers to lure them away in the long run.

Participants face anxiety about making decisions on how to make the most of their equity awards across all ages, and they are looking to their employers to provide opportunities to them to get help and guidance, to alleviate that stress. And that’s especially true for the millennial generation—who we love—and who has unfortunately suffered more than their fair share of financial setbacks.

Lastly, more and more participants are engaging in long-term financial planning and subsequently using their stock awards to help them save for retirement.

So, let’s bring it home with some suggestions—what can participants and their employers do to make the best financial decisions in terms of long-term equity awards?

LILAH: So, I wanna take that from two angles. One is, if you’re an employee or a stock plan participant, what should you do—and the other is if you’re an employer. 

If you’re an employee—first of all, you want to understand your choices so you can make informed decisions. Second, you can seek help from your employer. And third, understand where your equity compensation fits in your total financial picture.

And then, if you’re an employer—first of all, your participants are seeking help from you. Second, help employees understand their financial picture and where equity compensation fits. And then, finally, as an employer, you can offer greater access to financial advice and planning tools to all of your employees, so those employees who are on that full spectrum of financial needs—not just the executive team.

AMY: That’s fantastic advice, Lilah. You know, after 17+ years of serving clients at Charles Schwab, I can attest to the importance of planning and the peace of mind it can offer when tailored to your specific needs.

I mean, let’s be honest—financial planning doesn’t sound like a barrel of laughs. But you said it, Lilah—knowledge is power. And having a clear sense of where you are, what you need to plan for, and steps on how to actually get there is such a relief, I’ve seen it time and time again, that life just becomes a whole lot more fun when you aren’t stressed about your finances.

A financial plan is simply information that helps you make better decisions. Word to the wise—you are the decision maker.

Lilah, your insights have been terrific. Thank you so much for being here to unpack equity today.

LILAH: Thank you so much, Amy. It was great to be here. 

AMY: And thanks to all of our listeners for being on this journey with us.

In our next episode, we’ll explore the ever-shifting sands of the international investing landscape with the one and only Kate Gory, Vice President of Global Investing here at Charles Schwab.

From Brexit to China SAFE, Kate will help us unpack how to navigate the biggest hurdles when granting shares to international employees.

Until then, thanks for joining Equity Unpacked, and safe travels.

Subscribe to our podcast, and visit Schwab.com/EquityUnpacked. 

For important disclosures see the show notes, or visit Schwab.com/EquityUnpacked.