Equity Plans: Understanding Incentive Compensation Solutions

Executive pay rarely comes down to salary alone. For public companies, a meaningful share of compensation is delivered through an equity plan: stock-based awards designed to reward performance and build long-term alignment with shareholders.

Understanding how these programs work matters for CFOs, general counsel, comp committee members, and corporate secretaries at public companies.

What Is an Equity Plan?

An equity plan is a legal document that allows a company to grant stock-based awards to executives, directors, and key employees. For public companies, these documents are typically drafted as omnibus plans. This means a single plan can authorize several types of long-term incentive vehicles at once instead of requiring separate shareholder approval for each award type.

At its core, the plan exists to connect pay with performance. Rather than relying solely on cash compensation, companies use stock-based awards to give employees a direct stake in the business.

Getting a plan like this approved involves more than internal sign-off. Companies also need buy-in from shareholders and proxy advisors, which is where compensation governance advisory support becomes valuable during drafting and approval.

At Alliance Advisors, we guide boards and C-suite executives on how to structure equity plans so they clear shareholder and proxy advisor scrutiny before they ever reach a vote.

Can You Give Me an Example of Equity?

A common example is a Restricted Stock Unit grant. An employee might receive RSUs that convert into actual shares of company stock after a three-year vesting period. This would give them a direct ownership stake tied to the company’s stock price. More on this later in the article.

Why Companies Adopt Equity Plans

Total compensation usually includes three pieces: base salary, short-term incentives, and long-term incentives. For most senior executives, the long-term incentive piece represents the single largest component of pay.

Companies rely on these programs to:

• Attract and retain top executive talent
• Motivate long-term strategic performance rather than short-term wins
• Align employee incentives directly with shareholder outcomes
• Build an ownership culture across leadership teams

Here at Alliance Advisors, we recommend that companies revisit their equity plan’s design alongside their broader compensation philosophy, not as a standalone document. This keeps incentives and shareholder expectations aligned over time.

What Are the Different Types of Equity Plans?

Not every equity plan looks the same. Most include a mix of award types that give companies flexibility to reward employees differently depending on role, tenure, and performance goals.

Stock Options

Stock options let employees purchase company stock at a fixed price during a set exercise window. There are two main varieties:

1. Incentive Stock Options (ISOs): Offer certain tax advantages but come with strict qualification rules
2. Non-Qualified Stock Options (NQSOs): More common in practice due to fewer restrictions

The tax treatment differs meaningfully between the two. Per IRS guidance on stock options, ISO gains can qualify for capital gains treatment if holding-period rules are met, while NQSOs are generally taxed as ordinary income at exercise.

Restricted Stock and RSUs

Restricted stock and Restricted Stock Units (RSUs) grant actual shares, or the promise of shares, once vesting conditions are met. Restricted stock typically comes with voting and dividend rights right away, while RSUs convert to shares later.

Performance Shares and Units

Performance Shares and Performance Share Units (PSUs) tie payouts to specific business goals and are often measured over a three-year period. These awards reward long-term achievement rather than simply holding stock.

Stock Appreciation Rights

Stock Appreciation Rights (SARs) work similarly to stock options, except employees don’t pay an exercise price. The appreciation is typically paid out directly in shares.

For a deeper breakdown of how these award types fit into broader pay strategy, the executive compensation compendium offers additional context.

Proxy Advisor and Shareholder Considerations

Designing the program is only half the battle. Companies also need shareholder approval, and that means accounting for how proxy advisory firms will evaluate the plan.

Institutional Shareholder Services (ISS), the largest proxy advisor in North America, scores plans across three pillars:

• Cost: How the plan’s benchmark cost compares to company-specific targets
• Grant practices: Historical patterns in how equity has been awarded
• Plan features: Specific provisions within the plan document itself

Glass Lewis, the second-largest proxy advisor, also reviews compensation plans, though its policies tend to be less prescriptive than ISS. Alliance Advisors experts have noted that companies who model their plan against both ISS and Glass Lewis methodologies well before filing avoid last-minute redesigns.

Key Equity Stewardship Guidelines