Equity Compensation (Stock-Based Pay)

How It Works

Equity compensation comes in several forms: Restricted Stock Units (RSUs) are grants of stock that vest over time (typically 4 years with a 1-year cliff), giving you actual shares on the vesting date. Stock options give you the right to buy shares at a fixed "strike price" — profitable only if the stock price rises above the strike. Employee Stock Purchase Plans (ESPPs) let you buy company stock at a 10-15% discount through payroll deductions. Performance shares vest only if the company meets specific metrics. RSUs have largely replaced stock options at public companies because they always have value (unless the stock goes to zero), while options can become worthless if the stock price drops below the strike price. For startup employees, equity is highly speculative — the vast majority of startup stock options expire worthless. At public companies like Google, Meta, or Amazon, RSU grants are a significant and reliable component of compensation, with new grants refreshing annually.

Related Terms

• Total Compensation (Total Comp) — The complete value of everything an employer provides — base salary plus bonuses, equity/stock, benefits, retirement contributions, and perks.
• Base Salary — The fixed amount of money an employee earns before bonuses, benefits, overtime, or other additional compensation — the guaranteed floor of your total pay.