Harvard Business School Working Knowledge columnist Stever Robbins addresses equity-based compensation as a motivator.
You want people emotionally invested in the company’s success. You can get that investment by giving them meaningful work in service of a worthwhile goal. Hire people who believe in what you’re doing and match them to jobs. If you want to reward their commitment, then give them stock, but make it crystal clear you’re rewarding their innate involvement, not trying to buy it.
Stock ownership is also bestowing title upon key employees. You are becoming a partner in the business, however small your partnership stake is. Some companies charge a premium over the share price for this privilege.