Equity Participation

Equity Participation

Equity participation refers to the ownership of shares in a company or property. Companies can use different types of equity to create an equity participation program, such as options, reserve, phantoms stock, preferred stock, or common stock. Even with those potential benefits, the way a company makes equity participation available can have unintended consequences, such as exposing employees to new tax liabilities. The second reason for equity participation is it can be used by companies operating in emerging economies in which local governments want to reap the rewards brought on by development. First, it is used to tie the financial rewards of executives to the fate of the company, increasing the likelihood that executives will make decisions that will improve company profitability.

Equity participation represents the ownership in an asset, such as a company or property.

What Is Equity Participation?

Equity participation refers to the ownership of shares in a company or property. Equity participation may involve the purchase of shares through options or by allowing partial ownership in exchange for financing. The greater the equity participation rate, the higher the percentage of shares owned by stakeholders.

Allowing stakeholders to own shares ties the stakeholders' success with that of the company or real estate investment. In this case, a more profitable company will provide stakeholders with greater gains.

Companies can use different types of equity to create an equity participation program, such as options, reserve, phantoms stock, preferred stock, or common stock.

Equity participation represents the ownership in an asset, such as a company or property.
Equity participation effectively ties the stakeholder’s success to that of the company’s success.
Equity participation is primarily used as a form of employee compensation or by companies doing business in emerging economies.

How Equity Participation Works

Equity participation is used in many investments for two primary reasons. First, it is used to tie the financial rewards of executives to the fate of the company, increasing the likelihood that executives will make decisions that will improve company profitability.

This type of compensation may be delayed, reducing the possibility of executives making short-term decisions to boost the share price. Workers, not just executives, can also be offered equity by companies as a form of employee retention and work incentive. This typically is in addition to base pay and bonuses they receive.

The second reason for equity participation is it can be used by companies operating in emerging economies in which local governments want to reap the rewards brought on by development.

Benefits of Equity Participation

As with executives who receive equity, the intent is to encourage employees to contribute their best efforts toward the long-term growth and prosperity of the organization. The equity held by executives and employees can come with additional stipulations regarding how the shares may be converted, sold, or transferred. Even with those potential benefits, the way a company makes equity participation available can have unintended consequences, such as exposing employees to new tax liabilities.

Equity participation also allows local governments a say in company decisions. Residents of a municipality might also be offered equity stakes in the development or redevelopment of their hometown.

Example of Equity Participation

As an example, after New Orleans was devastated by Hurricane Katrina and the ensuing floods, there were proposals to grant displaced residents equity in the revenue generated from the redevelopment of their neighborhoods. The intent was to give people who lost their homes and livelihood a chance to reap the benefits of new business and wealth that would come to the city thanks to the rebuilding efforts. This would also make those residents more participatory in the decision-making process for the revitalization of their areas.

Related terms:

Abatement

An abatement is a reduction in the level of taxation faced by an individual or company. read more

Camouflage Compensation

Camouflage compensation is pay and/or benefits granted to upper-echelon employees that may not be disclosed clearly in mandatory company filings. read more

Carrot Equity

Carrot equity is incentive in the form of company shares granted to a manager of a firm who meets specified financial targets or operational goals. read more

Emerging Market Economy

An emerging market economy is one in which the country is becoming a developed nation and is determined through many socio-economic factors. read more

Equity : Formula, Calculation, & Examples

Equity typically refers to shareholders' equity, which represents the residual value to shareholders after debts and liabilities have been settled. read more

Employee Stock Ownership Plan (ESOP)

An employee stock ownership plan gives workers ownership interest in the company. read more

Mergers and Acquisitions (M&A)

Mergers and acquisitions (M&A) refers to the consolidation of companies or assets through various types of financial transactions. read more

Social Capital

Social capital is the practical outcome of informal interactions between people that can be attributed to networking in the business world. read more

Stakeholder

A stakeholder is a party with an interest in an enterprise; stakeholders in a corporation include investors, employees, customers, and suppliers. read more