Toward the end of the year, business owners and executives analyze their end-of-year finances to determine the company’s success, as well as how employees should be compensated. Many marijuana and hemp employers utilize their profits to give some of their more essential employees, such as initial team members or transitional employees with substantial connections or irreplaceable expertise, extra pay for their hard work. Owners typically do this with cash bonuses or equity-based compensation. As a hemp business owner, it is critical to understand each of these compensation methods before making a choice. Below, we break down your primary considerations.
What is the Difference Between a Bonus and Equity-Based Compensation?
A bonus is a standard lump-sum of cash gifted to employees at the end of the year and is usually based on the company’s performance. Meanwhile, equity-based compensation is a non-cash award that may include restricted stock, stock options, performance shares, and more. Equity-based compensation is most frequently provided by public companies but some private businesses provide this as well. Newer businesses may have insufficient cash to issue standard bonuses, which makes equity compensation more appealing, as it reinvests into the company’s growth and often encourages employee longevity.
Employer and employee taxes are a crucial consideration when determining the compensation package for your cannabis business. Employees prefer not to worry about any potential tax ramifications relating to their year-end bonuses. When you issue standard cash bonuses, the amounts are taxed as normal income. By issuing stock options or other forms of equity-based compensation, tax consequences are delayed until they vest. While this can make some employees hesitant, there are upsides to both. As the cannabis industry continues to stabilize, long-term compensation plans will become more commonplace. An experienced cannabis business lawyer can cover several scenarios for you and your compensation plans.
Profit and Ownership
Cannabis business owners should take future company profit and ownership into consideration when choosing compensation plans. Cash bonuses, for instance, are a simple option for end of the year compensation plans, as they do not transfer any authority or ownership. Additionally, they do not directly affect how the business operates moving forward. However, by issuing percentages of equity to your employees, especially in small marijuana start-ups, you are giving away portions of ownership and potential future profits. Once an employee owns a notable percentage of the business, they become a partner, and the owner may forgo some decision-making abilities against their will. However, if done correctly and with the right cannabis lawyer, a business may develop a partnership and compensation plan that does not transfer any ownership rights. Discuss your options with your cannabis lawyer or your business and corporate attorney.
The cannabis industry is still relatively new, so many precedents are yet to be solidified. When choosing a compensation plan, cannabis business owners may want to know the industry standards for compensation, as well as what their employees expect to receive. For this reason, it is important to remain active in your local cannabis community and to establish good relationships with your employees. In doing so, the compensation plan format can be a productive conversation that results amicably. An experienced cannabis business lawyer can provide updates on industry trends to help smooth this process.
Chelsie Spencer is an expert cannabis business lawyer with years of experience in corporate law, trademark law, copyright law, and more. Chelsie’s litigation experience includes numerous cases in both state and federal courts, and she frequently writes, speaks, and presents on issues facing the legal marijuana industry. Contact Ritter Spencer or give us a call at 214.295.5074 for more information.