Monitor retention risk with a simple metric
Managing unvested equity value is hard and annoying:
We design programs using intended value; unvested equity is based on current value
Unvested equity value is highly time-sensitive and messy
It’s sneaky hard to calculate correctly and requires fancy spreadsheet work
However, understanding unvested equity value is essential to managing retention risk, a central reason for using stock comp at all.
I dug into this topic in last week’s conversation with Tom Langle, Principal at Compensia (watch the recorded webinar here), where I mentioned my favorite metric: unvested equity as % of market new hire grants.
Here’s how it works, along with a couple others I’ve found useful.
Unvested Equity as % of Market NH Grants
All macroeconomics is microeconomics.
That is, to manage retention risk at scale, we must first understand the incentives of individual people.
If I’m considering an exciting new job offer, I want to be made whole on my unvested equity. The new employer may buy that out with a new hire grant and a sign-on bonus.
So, it’s useful to measure how your employees’ unvested value compares to these market offers.
Calculation:
[My Employee Total Unvested Equity] /
([Market New Hire Grant] + [Market Sign-On Bonus])Let’s take a P3 Software Engineer at my company with $200k in unvested value.
Using Compa, market 50th %ile is $156k for new hire grants and $15k for sign-on bonuses (note only 37% of SWE offers get sign-ons over the last few months).
200 / (156+15) = 1.17
Your employee has more unvested value than the market would pay her to leave — good. If the ratio is less than 1, then the market can provide an offer that keeps her whole, and it’s far easier to quit.
To scale this, explore how your population is distributed by this ratio.
Getting more precise
Looking at the first year only provides a more precise measure of risk.
Again, look to the job offer negotiation — the new employer might not be willing to buy out everything… but they’ll buy your first year.
Calculation:
[My Employee 1st Yr Unvested Equity] /
([Market 1st Yr New Hire Grant] + [Market Sign-On Bonus])Let’s take our same P3 SWE — she has $200k in unvested value and $60k vests over the next 12 months (remember, unvested value stacks all historical grants, so value does not vest ratably).
Market 50th %ile is $56k for 1st year new hire grant vesting value and $15k for sign-on bonuses (typically 1 year).
60 / (56+15) = 0.85
Less than 1 is not good.
Now, our employee looks like a greater retention risk than she did when we only measured the total value.
Manage risk with segmentation
We can establish different ratio targets for managing risk across different employee populations.
For example, let’s set a higher standard for key talent.
We want the standards higher because they have a greater impact on our organization and will command more value in the market.
In our P3 SWE example above, the market 90th percentile for NH Grant and Sign-On combined is $203k, 20% higher than the median. So, to stay competitive against the market's 90th percentile, we could set a ratio target of 1.25.
Alternative expressions
You can use a reasonable proxy if you find it easier to look at midpoints instead of market data.
Aim for an unvested equity value of approximately 1x your new hire grant midpoint, assuming your new hire grant guidelines are competitive.
For key talent, aim for 1.5x new hire grant midpoint, or something approximating guideline max / market 75th+.
Do this in Compa
Everything I described above can be easily analyzed in Compa.
Also, we recently launched a measure of market unvested equity value in Compa:
This would have been a minor nirvana for me when I was in comp because it completes the picture of understanding retention risk. That is, not just how my unvested value compares to market new hire grants, but how it compares to market unvested value, taking into account all the fluctuations in stock price, comp strategies, hot jobs, etc.
It’s the ultimate apples-to-apples market measure.
And Compa calculates unvested value automatically so I can use my fancy spreadsheet skills for other things. :)
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Having done this in the past on spreadsheets, this seems like a great feature!