7 Things to Know about Leaves of Absence and Equity Awards
August 03, 2021
Equity awards are intended to compensate employees for the work they do for the company; employees who are on leave aren't working, so it seems reasonable that leaves might affect both eligibility for grants and vesting. It might even feel unfair to employees who aren't on leave if equity awards aren’t adjusted for employees who are on leave. But there's more to this question than meets the eye.
1. Women Take More and Longer Leaves than Man
A 2018 survey by the Department of Labor finds that more women than men need and take leave and that women take longer leaves of absence. The difference in length of leave is attributable to the fact that women take longer leaves for a new child (54 days versus 18 days). (“Gender Differences in Needing and Taking Leave,” Abt Associates, November 2020).
Thus, excluding employees who are on leave from grants and adjusting vesting for leaves is likely to affect more women than men and arguably penalizes women for being caretakers. These policies also discourage men from taking leaves, further compelling women to take on more caretaking responsibilities than their male partners.
2. Not Including Employees on Leave in Annual Grants May Result in Inequalities
Say that a company issues annual grants on March 5. Let’s also assume that the following three employees take three months of maternity leave during the year, beginning on the dates indicated:
- Employee A’s leave begins on March 1
- Employee B’s leave begins on April 1
- Employee C’s leave begins on December 1
All three employee serve in similar roles and have performed at a level that qualifies them to receive an annual grant. Which of the three employees receives a grant?
Employee C will likely receive a grant because, at the time annual grants are issued on March 5, she hasn’t scheduled her leave yet. But what about employees A and B? Is it fair to exclude them from receiving an annual grant because, at the time grants are issued, they are either on leave (employee A) or about to start a leave (employee B)?
If employees A and B do not receive the same grant they would have received absent their leaves, they are penalized because of the timing of their leaves.
And if employee C isn’t given a grant the following year because she is just returning from leave, I’m not sure this is a better result. Sure, it evens things out among the three of them, but if the majority of employees taking leaves of absence are women, this policy will produce a pay imbalance between men and women.
3. Letting Managers Decide Whether to Issue Grants to Employees on Leave May Not Be a Great Solution
Sometimes companies leave the decision of who should receive equity awards to managers. Without specific instructions to do otherwise, managers may choose not to recommend grants for employees on leave, about to go on leave, or returning from leave. This behavior is likely exacerbated if managers have a limited pool of shares they can grant (i.e., if granting an award to an employee on leave prevents the manager from issuing a grant to an employee who isn’t on leave).
4. Employees on Leave Are Typically Eligible for New Grants
According to our 2021 Equity Compensation Outlook pulse survey on grant policies, 90% of companies make employees who are on leave eligible to receive annual grants:
- At 42% of companies, employees who are on leave receive the same grant at the same that they would have if they weren't on leave.
- At 12% of companies, employees who are on leave receive their annual grant when they return from leave.
- At 36% of companies, managers can decide whether to recommend annual grants for employees who are on leave.
The Equity Compensation Outlook is a collaboration between the NASPP and Fidelity Investments.
5. Overwhelmingly, Companies Do Not Adjust Vesting for Leaves
I am frequently asked whether companies toll vesting during a leave of absence. This isn’t part of our pulse survey because I already have data on practices in this area. Over 90% of companies do not adjust vesting for leaves.
6. Laws Outside the United States May Protect Employees on Leave
Many countries are more protective of employee rights than the United States; this includes restricting the adjustments that can be made to their compensation and benefits while on leave. Including employees on leave in annual grants and keeping vesting schedules intact throughout leaves is not only fairer, it simplifies compliance with local employment laws outside the United States. Multinational companies that adjust equity for leaves must track all the laws that apply to leaves.
7. Get to Know Your Employee Population Before Deciding on a Policy
Before deciding on a leave policy, make sure you have an understanding of the population of employees that will be most affected by the policy. Analyze leaves taken over the past one to three years to assess the following:
- Demographics of employees who have taken leaves (gender, age, race, country of residence, rank, and pay level)
- Number and length of leaves reported by the above factors
Having this information will help you assess the impact of any leave policies.
This blog entry was updated as of March 2022.