McKenzie Hunter Talks Cattle, Magic Beans and Top Tips for ESOPs

Jason McRobbie

Despite layoffs and hiring reductions—or perhaps because of them—many tech companies are gearing up their competitive offers, while taking a good look at how their employee stock ownership programs (ESOPs) might serve everyone better. We sit down with McKenzie Hunter, Senior Director of People & Culture with 7shifts, to talk about why ESOPs have become a hot topic and what to keep in mind when creating or retuning yours to optimum benefit.

Key Takeaways:

  • Employee stock ownership programs should be considered table stakes in the tech industry.
  • With average equity benchmarks in decline, ESOPs need to be revisited to maximize value for talent and organizations.
  • Compensations committees need to begin with a firmer grasp of their ESOP’s desired purpose, while ensuring pool options sustain new and tenured talent.

“One of the most commonly used core values in tech is something akin to demonstrating ‘extreme ownership’ or 'acting like an owner’, so why not put your money where your mouth is?”

For McKenzie Hunter, Senior Director of People & Culture with 7shifts, a full cycle team management platform geared for the restaurant industry, taking care of your people is as common sensical as caring for the cattle on her family farm growing up.

“In my family, cattle were our livelihood and everything to us. My grandpa once said, ‘Be good to the cattle and they’ll be good to you.’ Employees deserve no less. People talk so much in tech about creating a good experience for candidates throughout the hiring process and with onboarding, but that needs to extend to every phase of the employee journey. I am truly a believer that you can’t just celebrate people on their way in and shush them on their way out,” said McKenzie.

And while the wisdom carries, McKenzie knows the wants and needs of employees are just that much more complex—particularly in the tech industry where necessity and a competitive, global market have put employee stock ownership programs (ESOPs) in the spotlight.

“Having the opportunity to purchase shares in the company you are working for is something that candidates and employees have come to expect within the Canadian tech ecosystem—irrespective of a company’s stage or size,” said McKenzie. “Companies’ ESOP structures might look different, but I think all in all competitive salaries, benefits and equity incentives are table stakes in attracting and keeping great talent.”

McKenzie points to a pair of factors that make the ESOP more prevalent in current climes, chiefly the latest findings from Carta’s State of Compensation Report, which note that:

  • While salary benchmarks have remained essentially unchanged over the first half of this year, the average equity benchmark across all seniority levels (with the exception of C-suite candidates) has declined by 26%; and that
  • The key reason for this is that while companies typically replenish their option pools when they raise a new round of financing, funding rounds have grown scarcer, so companies have become more conservative with the remaining available option pool.

That puts ESOPs under far closer scrutiny in terms of value, McKenzie notes, right across the spectrum of the employee lifecycle—while providing invaluable organizational function when wielded properly.

“Providing employees with the option to truly have ownership in the company helps attract and retain great talent while incentivizing long-term engagement and performance. It can generate by-in and excitement where folks can collectively look forward to, and celebrate, an exit event,” said McKenzie. “As a general aside, what’s really nice about stock options is that they’re viewed as a future financial benefit and incentive. They really do help align employees with the company’s vision and performance—and if people are educated properly and understand what they are and how they work, it helps to create that general sentiment that we’re all in this together.”

As for key factors to consider when creating your ESOP or forming your next iteration, McKenzie offers the following insights:

  • Know Your Purpose: First and foremost, when you are designing your company’s ESOP, you need to know what you want the desired impact to be from the outset. Is the point to retain your top performers and create a holding mechanism? Is it to attract the very best talent? Is it to generate that collective excitement we talked about?

    It’s important to remember that you’re dealing with a finite pool, so you want to make sure your ESOP achieves your desired purpose, while ensuring the stock options are responsibly granted in line with that option pool. Sometimes you don’t have enough to do everything everywhere all at once, so you have to have tradeoffs and be more strategic and intentional about how you structure the plan.

    From there you can determine which buckets you wish to have and how each one is structured. Some common ones would be new hire grants, promotion-based grants or the more rare performance-based grants that might target your top five to 10 per cent of high performers and other structures like tenure top-ups.

  • Model For Turn and Burn: It’s important when you are modelling out your ESOP and forecasting it that you take turnover into account, and not just the approved hiring plan or headcount projections. You could have somebody who is lasting only a year and if they’re exercising their options when they leave, you’re having to replace that headcount, but you’ve also lost a year’s worth of what’s vested.

    At the Compensation Committee level, you ultimately need to decide what your desired burn rate is for your option pool. It might be a conservative, low percentage. Some might have that higher. Either way, once you establish a burn rate that you’ve committed to for whatever period of time—whether it’s a year or longer—then you can model out what you can allocate strategically from there.

  • Keep Communication Simple and Steady: Strive to ensure that the stock option plan is administratively simple and easy for employees to understand and invest the time into educating employees about what stock options are and how they work so they fully appreciate what they mean and how they affect their overall compensation.

    Having visibility around your ESOP and what it offers is crucial. At 7shifts, we have a two-page, ESOP ‘everything-you-need-to-know’ that everybody reads. It covers basic terms, how it works, transparency about allocations to different levels and puts everyone on the same page. 

    Remember that your recruiters and everyone involved in your hiring needs that ESOP to be easy to communicate to be able to answer questions that people ARE going to ask—what the stock options are, how they work, what the terms are.

    I think it really has to be clearly communicated in any offer, but it’s important that the education is built right into the onboarding too, maybe with a special session about Equity 101. This has folks thinking about the value from the beginning, so keep that information easily accessible whether that’s on your team drive or a via a lunch and learn—instead of setting it and forgetting it.

  • Review and Replenish: Make sure you are reviewing your employees’ stock options regularly, but particularly at the point where their initial grant has fully vested—this would most commonly be upon four years since joining the company. At that point, their options are fully loaded to 100 per cent, so there is nothing holding them to you. You need to be aware of when they run out of those options because they are the golden handcuffs.

    All that said, these top-ups should be automatic, rather discretionary in nature. If someone is being performance managed out of the business, issuing a new stock option grant solely based on their tenure would send a mixed message.

    On the balance, it’s important to make sure individuals continue to receive the same benefit (aka the number of options) they’d receive if they were to leave the company and join another company. This is irrespective of how many unvested stock options the tenured employee might have. They should be vesting at least as much as a newly hired employee WITHOUT factoring in their Performance options, otherwise you're at risk of essentially saying that you need to be a top performer in order to keep up with a new employee who is a middle-of-the-road performer.

Most importantly, keep the vision alive, McKenzie stresses. Remember your ESOP efforts are not only building financial allure and self-ownership into your company DNA—they are fueling a collective dream of limitless potential.

“I think at the end of the day, you are giving people magic beans. You don’t know if they’re going to grow into something bigger or not. You’re hopeful, but you have no idea where it’s going to go,” said McKenzie. “With ESOPs, you can create that shared hope and wish to build something that collectively benefits everybody. It’s a special and unique opportunity that’s not always as common or possible in other industries.