Equity Through a DEI Lens: When Equity Doesn't Drive Equity

Throughout time, the approach to compensation has largely remained the same. From factory shift workers in the industrial revolution to the information-age employees of today, companies pay by the hour or annually based on the business requirements for the role, the candidate’s experience, and the competitive labor market rates at the time of hiring. 

Over time, companies began to introduce the idea of “total compensation” as they started to offer benefits such as medical and dental coverage, retirement savings, and other programs, as well as bonuses either for individual or company performance. However, if you ask any worker how much they make, you’ll hear their hourly rate or an annual salary, almost none will say they made thousands in a 401k match last year or their employer provided a ‘work from home’ stipend.

Equity’s role in compensation

This leads to a key issue for both employers and their employees – to make more money, employees often need to leave and go work for someone else. Called the “loyalty tax,” competitors or other companies will often overpay to attract new talent. Even if workers are happy at their job, the lure of additional salary is hard to pass up, especially in times of inflation or facing major financial milestones in their own lives, like paying off student debt or buying a house.

While inflating salaries can certainly help recruit employees, companies today are equally as concerned with retaining them and have begun to adjust the mix of compensation to do just that. Especially in tech, financial services, and biotech industries, stock options have been used as a key component of compensation. The benefits centered largely around helping employees feel invested as ‘owners’ of the company and its future success. Meanwhile, their vesting schedule over a number of years encouraged employees to stay put. 

Equity’s intersection with DEI initiatives

The challenge when focusing on equity as a key piece of compensation comes when looking through the lens of diversity, equity, and inclusion (DEI). Without a doubt, DEI initiatives are accelerating in the wake of the post-pandemic shift to more flexible and hybrid working environments and an increasingly diverse workforce. In fact, a recent survey found that more than 80% of responding organizations said DEI has been beneficial and contributes to the development of a diverse and inclusive culture.

And there is a real business impact to DEI. According to data from McKinsey, companies identified as more diverse and inclusive are 35% more likely to outperform their competitors. And a Glassdoor survey noted that DEI is an important factor for the majority of today’s candidates with 76% reporting that a diverse workforce is an important factor when evaluating companies and job offers.

From the DEI perspective, equity in the workplace ensures fair and impartial processes and outcomes for every worker in the company. This is based on the recognition by the leadership of the challenges, barriers, and advantages at play for different workers at any point in time and that they do not all start on a level playing field. For compensation, that means it’s not a one-size-fits-all answer for every worker.

The trouble with equity

While they do provide some retention benefits, stock options, restricted stock units (RSUs), and other forms of equity can have very complex tax implications and most workers do not have access to an accountant to help them sort out what is best for them. Stock options also fluctuate based on the macroeconomy, stock market, and company performance or valuations. In fact, companies are often forced to issue new options when employee stock options are ‘underwater’ and have lost value. 

The fact that the future value of equity is not guaranteed can be especially problematic in today’s DEI environment as it does not address the diverse needs of today’s multi-generational workforce. 

As an example, experienced or senior workers who are more likely to own a home and have money saved for emergencies, college, and retirement are in a better position to give up some salary in exchange for stock options. In stark contrast, recent college graduates, hourly workers, or others that more likely have consumer or student debt and do not own a home typically value cash today over the potential future value of equity. In fact, sacrificing cash or salary today for equity could make their personal financial situation worse in the moment and over the long term through additional interest and payments on debt or missing out on compound annual growth from savings or real estate appreciation.

Balancing company compensation goals with the diverse needs of workers

In today’s multi-level, multi-generational workforce, equity does not mean equality given the variable needs and financial resources and situations of different workers. As part of DEI programs focused on compensation, it’s critical for companies to understand the needs of workers as they progress through various stages of life so they can build compensation packages that are equitable in terms of sharing in the company’s success and advancing personal financial goals.

Shopify’s recent “Flex Comp” announcement and Tesla’s shifting employee performance compensation from stock options to cash are recent examples of companies recognizing the need to rethink equity’s role and better align compensation packages to address company needs in terms of performance, ROI, and retention as well as the personal financial needs of its employees.