Masters in Business: At The Money — Buying into the Ownership Society

Host: Barry Ritholtz (Bloomberg)
Guest: Joey Fishman, Equity Compensation Expert at Ritholtz Wealth Management
Date: August 27, 2025

Overview

In this episode, Barry Ritholtz explores the concept of the "ownership society" with equity compensation expert Joey Fishman. The conversation delves deep into equity-based compensation, unpacking how stocks, options, and alternative instruments can shape incentives, attract and retain top talent, and generate significant wealth (or not) for employees. Fishman and Ritholtz address the complexities, regulations, and strategies involved in equity compensation, offering both cautionary tales and insights into building long-term value.

Key Discussion Points & Insights

1. Why Firms Offer Equity Compensation

[01:53 – 02:45]

• Alignment of Interests:
  Joey Fishman: "It sets the tone from the beginning and incentives. As long as they're properly aligned, it puts everybody in the right position to help push the firm forward and help succeed."
• Cost Consideration:
  Offering equity is less expensive than using cash and can be a powerful recruitment and retention tool.

2. Variation Across Industries and Companies

[03:17 – 04:18]

• Industry-Specific Approaches:
  • Tech: Heavy use of stock options, especially during bull markets.
  • Banking: Prefers restricted stock awards (RSAs).
  • Oil & Gas: Leans toward RSUs for stability despite industry volatility.
• Wealth Management:
  Companies that award equity better retain talent, whereas big "wirehouses" rely on upfront cash bonuses, leading to frequent talent movement.
  Ritholtz: “Is that, is that why we seem to have sort of a prisoner exchange at the big wirehouses?...”
  Fishman: "You hit the nail on the head. Exactly..."

3. Compensation Structure by Employee Level

[05:01 – 05:58]

• Executives Get More Complex Packages:
  • Addition of Performance Stock Units (PSUs) that require hitting certain goals.
  • Shift from simple annual share grants to "put up or shut up" performance-based equity.

4. Profit Interest, Stock Appreciation Rights, Phantom Stock

[05:58 – 07:06]

• Profit Interest:
  Employees participate in upside beyond current valuation without initial investment or tax penalty.
• Stock Appreciation Rights (SARs) and Phantom Stock:
  • SARs: Employees earn the appreciation in value over a set period without being granted real shares.
  • Phantom stock less common now due to severe tax liabilities.

5. Odds of 'Winning' with Equity Compensation

[07:06 – 09:28]

• Only 4% of stocks are responsible for most market returns.
• 80% of employees sell their equity immediately after vesting.
  Fishman: “...about 4% of stocks are responsible for the vast majority of market returns...and roughly 80% of employees sell their shares immediately after they vest.” [07:27]
• Barriers to a Big Payoff:
  • Early entry needed, patience (vesting period), ability to manage tax traps, tolerate dilution, and time liquidity events.
  • Fishman: “It's kind of like winning the lottery, but you don’t..." [08:09]
• Most equity ends up being “bupkis”:
  Fishman: “…63% of stocks are losers throughout the course of their lifetime. So the vast majority of stocks, that IPO or... equity grants that are given turns out to really be bupkis in the end.” [09:28]

6. Regulatory History & Rule Changes

[09:48 – 11:56]

• 1990s Clinton-Era Cap on Executive Pay:
  • Led to explosion of incentive stock options (ISOs) for tax-advantaged compensation. Fishman: “The original goal was to put a ceiling on executive compensation and the output that actually occurred...” [10:20]
• Post Dot-Com Reforms:
  • Independent valuations through 409A.
  • Can't issue options below market value; must meet or exceed market or, for insiders, 110% of value.
  • More stringent vesting schedules to prevent manipulation.

7. Tax Schemes, Conservation Easements, and QSBS

[11:56 – 14:12]

• Caution Against Tax Tricks:
  "Conservation easements" are a tax avoidance fad, but the IRS response makes them very risky and costly. Fishman: “The tax bill that's going to be jammed down your throat is going to be so insane you'll regret having done it in the first place.” [13:02]
• QSBS (Qualified Small Business Stock):
  • The “gold standard” for gaining tax-free capital up to $10M if certain conditions are met.
  • Allows employees to keep “100 cents on the dollar” on their first $10M in gains—vs. ~48 cents after tax in some states. Fishman: “...the first 10 million is entirely tax free at the federal and the state.” [14:12]

8. Dilution, Private Companies, and Cap Table Tracking

[14:12 – 15:30]

• Dilution is significant, especially during "down rounds" in startups.
• Tools like Carta have improved employees’ understanding of their holdings.
• Most startups fail, but the leverage of options in winners can be worth it.

9. Tax Withholding and Mitigation Strategies

[15:30 – 16:48]

• Companies are only required to withhold the statutory minimum tax (22–24%); actual liability is often 35–37%.
• Employees should consult advisors or CPAs to avoid under-withholding and surprise tax bills.

10. Practical Upsides of Equity Compensation

[16:48 – 17:19]

• Even in solid, non-lottery-winner companies, equity grants can meaningfully improve financial outcomes and quality of life. Fishman: "Any additional cash flow that you can capture that you can then add to your financial plan to help reinforce your quality of life is a great thing." [17:19]

Notable Quotes & Memorable Moments

• On odds of equity riches:
  Fishman: “At the end of the day, it's about 4% of stocks are responsible for the vast majority of market returns... and roughly 80% of employees sell their shares immediately after they vest." [07:27]
• On why employees cash out:
  Ritholtz: "Is it just that I'm risk embracing and I want to go on the ride and other people have mortgages, kids and bills...?" [09:10]
• On most equity grants’ value:
  Fishman: “63% of stocks are losers throughout the course of their lifetime... equity grants that are given turns out to really be bupkis in the end.” [09:28]
• On tax avoidance schemes:
  Fishman: “The tax bill that's going to be jammed down your throat is going to be so insane you'll regret having done it in the first place.” [13:02]
• On the value of even moderate equity gains:
  Fishman: "Any additional cash flow that you can capture... to help reinforce your quality of life is a great thing." [17:19]

Timestamps for Key Segments

• Introduction to equity compensation and incentives | [01:53]
• Equity in different industries; retention and incentives | [03:17]
• Comp structure for execs, PSUs, and performance metrics | [05:01]
• Profit interest, SARs, and alternative compensation | [05:58]
• Winners, losers, and odds of big payoffs | [07:06]
• Regulatory and tax history, 409A rule, and backdating scandals | [09:48]
• Tax schemes: conservation easements and QSBS | [11:56]
• Startup equity, dilution, and cap table tracking | [14:12]
• Tax withholding and advice for employees | [15:30]
• Advantages of moderate equity participation | [16:48]

Conclusion

Barry Ritholtz and Joey Fishman provide a thorough tour of the rules, realities, and risks of becoming part of the “ownership society” through equity compensation. They urge listeners to approach with eyes open: while equity can be a path to significant wealth, for many it turns out to be a far more modest—yet still meaningful—component of compensation. Success requires luck, timing, planning, and vigilance around taxes and regulations, but the potential upside is, as Ritholtz summarizes, “enormous… over and above your employment cash compensation.”