Question

Critique (or assess) the effectiveness of equity-based rewards systems for both compensation and benefits. Why do you believe companies use equity to reward employees and is that approach effective?

Answer 1

Equity base compensation refers to the fact when the company does not pay in cash rather it pays in the form of stocks and shares and makes the employee a partner in the firm. The effectiveness is sometimes very good for the tenured employees because they have already served the organisation for good number of years and now when the company feels they would not switch to some other company then it is always better to pay in the form of equity rather than cash because it shows a certain amount of respect as well to the employee that he/she becomes a partner in the firm. Also, it does not affect the pocket of the company much because the pay-out is directly linked to the rise in shares.

Companies choose equity because it is a safer and cheaper option for them to pay and the if the rise in shares is more then automatically the employees gets paid more which means that the employee stay motivated to work harder and in that process he/she feels privileged about the fact that he is being respected by giving a sense of partnership in the firm.