The findings from behavioural economists are increasingly affecting the design, communication and operation of equity compensation plans. Director of Business Development at Equatex UK, Stuart Bailey, tells us more.
When I studied Economics at university 30 years ago, the focus was on developing a set of rational laws that determined why money works in certain ways. Increasingly over the past 20 years, academics have built a greater understanding of how psychological, emotional and social factors defy some of these logical rules and determine the economic decisions that people make.
In many respects, behavioural economics has become the flavour of the month. It has had a huge influence on public policy, and financial services organisations are developing products and services that take account that people make decisions about money based on a range of factors, not all of which are rational.
Increasingly, the findings from behavioural economists are affecting the design, communication and operation of equity compensation plans. For example, economists have identified that people will take more account of a message if they can relate to the person giving it. They are also more likely to take action if they understand that it is the popular thing to do amongst the workforce.
Economists have identified that people will take more account of a message if they can relate to the person giving it
In the UK, one of the big supermarket chains decided to move from having a standard way of communicating their share plans to one that differentiated the message so that it was appropriate to the various parts of the business. Non-management shop floor employees received an invitation pack that included an endorsement from shop floor colleagues who were already in the plan; office employees’ invitations had a message from one of their colleagues. Feedback following the invitation showed a greater level of take-up and employee engagement due to the different approach.
Research has also shown that in general, employees do not necessarily fully grasp the real value of deferred compensation. Often benefits that pay out today are viewed as having greater value than those that have the potential of significant upside in the future. As such, it’s important to ensure participants have access to information that clearly explains how a deferred compensation plan works and to make it easy for a participant to get an understanding of the value of what they have awards over.
At Equatex, we have recently completed a redesign of our participant portal. The development was based on a significant amount of research and analytical work of how our participants use a portal as well as taking account of some of the findings from behavioural economics. It was clear that different users are looking for the site to provide different things. Some want access to a lot of information before making decisions. Others are cash-rich and time-poor with the main attraction being able to transact quickly. And there are others who are fairly nervous and who don’t have much knowledge when it comes to money. For each of these, the portal provides specific communication and tools.
Taking account of the importance of showing the value of awards, the portal provides a real-time picture of the value of their awards when they land on the home page and the ability to complete projections of future value using a simulator tool.
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If you have any questions about our participant portal, or would like to arrange a demonstration, please feel free to get in touch.