When many think of the blockchain, visions of skyrocketing and crashing bitcoin prices, Elon Musk fueled meme coins, and a list of privacy and currency debates probably flashes to mind.
All this is undoubtedly true, but these are issues that point much more to some uses of the blockchain, more so than the blockchain itself. This breakthrough technology is here to stay, and it is spreading far and wide, bringing security, speed and reliability to diverse industries while filling even more varied needs.
The business-as-usual approach to employee incentive and compensation programs has changed very little, despite the rest of the corporate world accelerating at a rapid pace. However, the blockchain gives these programs a chance for significant upgrades that benefit all stakeholders, from employees to management and shareholders or owners.
At the base level, blockchain is defined as a 'trust protocol' that eliminates the need for a third-party verification to confirm involved stakeholders in the transaction and validate the execution of the value exchanged. The technology's mechanics are not in question here, however, it’s about what it can deliver. In other words, the critical question that requires focus in the successful deployment is not 'the how' but rather 'what' needs to be done. Without any doubt, the blockchain deployments, if done right, can be game-changing in the people management space — both for companies and the employees who work for them.
Blockchain-Based Total Reward Program Advantages
We see six key areas emerging within blockchain-based total rewards programs. Companies among the first to implement these solutions are likely to win praise for their forward-thinking and vision, but most importantly, develop a significant competitive advantage in the war for talent. Giving qualified employees the option of receiving some or all of their pay in a restricted company coin, a stable coin, synthetic equity incentives, digital benefits, or other cryptocurrency choices are interesting proposals with great potential. Any or all of these possibilities would be delivered on the blockchain.
Direct Compensation of Employees
Payroll through blockchain-based technologies is the most straightforward of the possible implementations. An employee can be given a choice of receiving his payment either the traditional way or through a cryptocurrency asset, most notably a stable coin.
Synthetic Equity on the Blockchain
As companies grow, this option would allow employees who meet well-defined goals to share in the success through company shares or options delivered in the form of restricted coins. This helps build employee wealth and their sense of personal investment in the company. By enabling smart contracts, managing these rewards programs will be smooth and straightforward. Synthetic equity or phantom stock plans and stock appreciation rights (SARs) are two types of stock plans that don't use stock at all but still reward employees with deferred bonuses tied to the company's stock performance.
Optimizing Company Benefits Management Costs
Insurance networks were quick to see the potential of the blockchain, and all big players are making the shift to using the technology. This makes integrating a company’s benefit and compensation programs, also on the blockchain, an obvious choice. The increased speed and communication, plus easy management, will cut costs. With this being an area of great concern for many companies, finding ways to better handle healthcare and life insurance is a huge win. The blockchain’s security is also a plus for employees with privacy concerns.
The increased use of freelancers, remote contract workers, and other gig economy elements has left open the question of how to incentivize project work without straining budgets upfront. Blockchain token rewards based on hitting performance goals are a clear and direct solution, enabling high performers who are not necessarily permanent hires to be rewarded fairly and equitably. The effect this could have on gig worker motivation and morale is apparent.
Awards, Prizes and Accolades Tokenization
The use of tokens for employee prizes and rewards is limited only by the creativity and imagination of a company’s management and HR team. Again, the strength of this forward-thinking approach is the ability to tie delivering these tokens to employees in a way that’s bound to performance marks or even specific dates in case of holiday bonuses or related reward — with all of this operating securely and reliably on the blockchain.
Company-Specific Restricted Coins
A company with its own tokens for use with the programs above and more, which are restricted to its own platform and blockchain network, is an excellent safeguard for company and employee interests. It is also an exciting kind of marketing within its industry, as word about this kind of program spreads. The release of the tokens can follow many different mutually beneficial strategies in tune with the company’s own unique vision and ethos.
2022 is the year to look at company benefit and compensation program issues honestly and open-mindedly. And then make a decision based on today and tomorrow's shifting work realities. Using strategies and programs made five years ago pre-pandemc is not a strategy that will achieve optimal performance. So there's no time like the present to bring in experts in this area and see how the blockchain can revolutionize your company's incentive, rewards and compensation program now and in the future.
Synthetic Equity on the Blockchain Versus Traditional Stock Plans
Finding an intelligent incentives solution to award, engage and retain employees by aligning their commitment fully to the company's future is a common challenge. Fortunately, new solutions have been developed that mirror the best elements of using stock as an incentive without the potential drawbacks from the company perspective. For example, synthetic equity on the blockchain (phantom stock) program is a supercharged technology version of a long-term incentive plan (LTIP), the cornerstone of executive pay.
Synthetic equity on the blockchain can be considered a deferred bonus that’s value is tied to the company itself. This can have an apparent positive effect on the performance of talent holding these synthetic equity stocks. The employees who have received these synthetic equity stocks are directly interested in seeing their company prosper.
We find the term synthetic equity the best description of these awards to avoid confusion with other benefits program choices. Synthetic equity can be used broadly or narrowly since its definition has yet to be completely boxed in and agreed upon. Synthetic equity can be used to describe plans in which employees must wait until a future date to receive their full potential financial award. This can mirror restricted stock awards or stock option grants in the form of “phantom stocks,” with many choices in between.
The phantom stock is sometimes called phantom shares, simulated stock, shadow stock, or our favorite choice, synthetic equity. In addition, stock appreciation rights (SARs) are a form of phantom stock, which we will refer to as phantom stock options for clarity's sake.
An ESOP (employee stock ownership plan) is a qualified retirement program that has the advantage of involving employees in ownership accountability and company value sharing. These tax-deferred trusts deliver shares that rise in value with time, generally cashed out on retirement. They are held in a tax-deferred trust and are legally bound to follow non-discrimination rules. This approach to employee benefits is growing in reach and popularity. In our estimate, due to the non-discrimination factor and other hard and fast rules, an ESOP is best suited for “general” employees, with the leadership team likely to need something with more leeway. Synthetic equity stocks meet this need for flexibility, and while they offer economic value that can certainly rise with company performance, actual company equity is not being sacrificed.
ESOP may be an optimal choice when:
- The company is heading towards an IPO event, making options a significant reward to employees who helped the company through such a crucial time.
- The company is in an industry, like tech startups, whose culture tries its best to avoid paying in cash, preferring options that defer their need to pay out immediately.
- The owners view elements of its leadership team as potential near future buyers of the company. Their owning options will help create a smooth ownership transition.
Apart from these three situations, synthetic equity stocks are almost always better for the company and its employees. Clear advantages are highlighted by:
- No dilution of equity.
- No concerns over issuing stock certificates.
- Shareholder meetings remain free of employees as a potential distraction.
- No fiduciary concerns.
- No need for a market to create cash for employees to exercise their options
- No need to redeem shares from employees fired or laid off.
- Significantly reduced concern over securities laws and compliance.
Take the Mystery Out of LTIPs With the Blockchain
Its remarkable to realize that there is no shortage of companies who spend millions yearly on LTIPs, which neither they nor their executives seem to understand well. With LTIPs frequently accounting for up to 80% of executive pay, this is not something that should be allowed to linger for companies wishing to perform at their highest potential. Moreover, an incentive plan veiled in mystery hardly incentivizes.
Research has shown that executives and committees controlling these plans have little influence on what and when they deliver. With the amount of money involved, this is no small problem.
Fortunately, blockchain technology also opens the door to more pragmatic and smarter LTIP design, execution and significantly improved communication.
About the Authors
Ivan Bjelajac is the CEO of MVP Workshop, a software company based in Belgrade, Serbia.
Tesha Teshanovic is principal at Agile Dynamics LLC., a business management consultancy in Abu Dhabi, United Arab Emirates.
Paul Lalovich, MSc is partner at Agile Dynamics LLC., a business management consultancy in Abu Dhabi, United Arab Emirates.