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The Equity Question: Using Company Equity to Attract and Retain Talent

Published in March 2021

When a company is negotiating a sale or capital raise, one of the important questions that surface is whether it makes sense to put an employee equity plan in place (“The Equity Question”). This is especially pertinent for entrepreneurs that desire to attract and retain talent to grow their business and maximize long-term value.

This is especially relevant for the insurance industry, an area of focus for Evolve. The Equity Question is discussed relatively often given the increasingly tight labor market for talent in the insurance space. A wave of InsurTech IPOs led by Lemonade and Root Insurance (and growing investor interest in InsurTech) has made the situation more acute, with tech firms drawing top talent away from more traditional insurance firms.

For entrepreneurs considering an M&A or financing deal, an equity plan is an effective signal to buyers and investors that they are focused on long-term business growth. To optimize valuations, Evolve advises on highly successful customized equity plan structures to maximize M&A and growth equity valuations, ranging from stock options to complex Restricted Stock Unit (RSU) plans.


Current Labor Market Dynamics

With digital transformation in full swing, there is persistently strong demand for a relatively scarce tech-native and media-savvy workforce. However, these employees can also easily navigate an online world of job opportunities. Since the pandemic, employees have placed added value on factors such as work location flexibility and meaningful work, and this trend is set to intensify this year.[1] In response, managers of traditional insurance firms must improve employee engagement to retain their vital workers, as some seek greener pastures such as the more dynamic InsurTech sector.

The retirement of older employees also poses a challenge, with the effects deeply felt in insurance sectors that tend to have a larger proportion of retirement-age employees. A 2010 study by McKinsey & Company found that 20% of insurance employees were near retirement age (in contrast to 15% in the broader financial services workforce) and was projected to rise to 25% in 2018.[2] The trend is expected to continue into the future, with an accelerating number of Baby Boomers having left the workforce since the beginning of the pandemic, whether voluntary or involuntary.[3]

To fill the gap, firms need to recruit employees with critical technological skills more aggressively. The McKinsey Global Institute highlights that technological skills will occupy 55% more working hours from 2016 to 2030 in the insurance industry.[4] Insurance-related roles that will be the most affected by automation include IT infrastructure, call center, claims, underwriting, and finance. As managers compete in a global marketplace for these employees, they need to consider new approaches to incentivize the best talent to join their ranks.


Overview of Employee Incentive Schemes

To keep up with the demands on labor, traditional insurance companies that rely on salary and commissions as the primary incentive component need to be receptive to various employee incentive mechanisms. Historical trends help to shed light about the relationship between labor shortages and compensation innovation (and its subsequent adoption by firms to remain competitive).

There are parallels with the hunger for talent during the dot-com era. Compensation innovations in the form of stock-based compensation skyrocketed in popularity from the late 1980s, primarily adopted by early technology startups and some established firms like Citigroup and Bank of America. The tech boom in the following decade, together with regulatory simplicity in those days, made stock option programs an attractive tool for employers to aggressively attract and retain talent by allowing employees to benefit directly from the company’s rapid growth.

Insurance companies that want to explore employee equity plans may want to consider two of the more popular forms of stock-based compensation: stock options and Restricted Stock Units (RSUs) depending on the business goals.

Stock Options                                                   

  • These are purchased at a pre-determined price, allowing the employees to capture the appreciated value when the fast-growing company’s stock appreciates (sale or IPO).
  • More tax efficient, as they are not taxable as income, while capital gains tax is only levied after the options are exercised and stocks get sold by the employee.
  • Suitable for InsurTech firms that prioritize growth at all costs (e.g. AI, claims technology, digital carriers), such as Verisk Analytics, which has an employee stock purchase plan.


  • These are typically offered to employees based on their performance or tenure, with a vesting schedule.
  • Vested shares will be taxed as income and will remain illiquid as long as the company remains private.
  • Owners will find themselves accountable to employees that own shares, which may complicate the process of running the business.
  • Suitable for insurance firms focusing on maximizing cash flow, as employees are incentivized to boost profitability through profit-sharing, such as TPAs, MGAs / MGUs, agencies and brokers, and other tech-service firms.


Adopting a Stock-Based Compensation Program

Many insurance services firms that we work with focus on cash flow and will likely find an employee equity plan the most suitable incentive mechanism. Given the tax and business implications, some companies have opted for a phantom stock program as the first step. In this case, employees have a right to a share of profits but do not have legal rights of ownership. However, in the long run, cultivating a strong ownership mindset among their key employees is especially important for making critical business decisions. This necessitates an employee equity plan at some point, and a deal process can be an opportune time to implement the plan.

Employee Stock Ownership Plans (ESOP) have also been gaining traction among insurance agencies and brokerages. It is a tax-qualified retirement program / trust fund which owns stock of the sponsoring company for the benefit of its employees. The company contributes shares into the ESOP, which can also borrow money to buy new or existing shares. Shares in the trust are allocated to each employee of the company. Scott Insurance, based out of Lynchburg, VA, is a 100% employee-owned company, one of the first companies in the country to establish an ESOP in 1975.[5]

Some insurance firms have been around for decades, maintained by an extensive intergenerational family. Having a transparent employee equity plan can reassure each family cluster that they will receive their fair share in an equitable manner. Ideally this will minimize family politics within the company, with everyone working together to expand the pie for all.

Even if an owner is planning to exit the business completely, having an employee equity plan can signal to prospective buyers that the business is under good management by key employees. If management can demonstrate how essential these employees are, this could help the business fetch a more attractive valuation and drive long-term valuation growth.



In today’s competitive / tight labor market in the insurance space, attracting talent and retaining them is more critical than ever. Owners can make plans to carve a portion of equity to the key managers and create an incentive pool. Tech companies have been doing this successfully for years and the insurance space should take note. Giving up ownership, no matter how small, is not easy and it may take some time for owners to overcome the psychological hurdle. For sellers or those seeking to grow their business, the equity question will come up often and owners would do well to consider this issue early.



[1] https://www.ibm.com/thought-leadership/institute-business-value/report/employee-expectations-2021

[2] https://www.griffithfoundation.org/uploads/McKinsey-Talent-white-paper-FINAL.pdf

[3] https://www.benefitspro.com/2020/12/31/covid-19-alters-retirement-horizons/

[4] https://www.mckinsey.com/industries/financial-services/our-insights/transforming-the-talent-model-in-the-insurance-industry

[5] https://www.scottins.com/about-scott-insurance/employee-ownership/