How to make the most of your equity compensation
Morgan Stanley at Work06/16/21
When it comes to workplace benefits, health insurance and a 401(k) match are among the most desired, but the often misunderstood equity compensation plan can also be highly valuable.
When you understand how your company’s stock plan works, you can more effectively incorporate equity compensation into your broader financial toolkit and use it to help achieve your goals.
If you’re among the 14million+ Americans1 with access to some form of equity compensation, here are five ways you can potentially make the most of it:
1. Remember that your equity compensation is a part of your overall compensation package
In addition to your salary, your company likely offers a range of benefits to support your financial life. For example, if you have access to a 401(k) match, that money is part of your total compensation, so not taking advantage of it in full is like leaving money on the table. Think of equity compensation in a similar way. It’s one more opportunity your employer has provided to help you potentially benefit from the growth of the company.
2. Know how to value your equity compensation
Just as you know the exact value of your salary and how much you might earn in a bonus or commission, you should aim to know the potential value your equity compensation. Knowing this number can help you decide when and how best to use your shares.
While stock prices can fluctuate based on market movements, company performance and other factors, you can calculate the approximate potential value of your equity compensation. Here’s how to do it:
- Go to the Stock Plan Tab then click on Holdings in the drop down menu.
- From the default view, View by Type, you will be able to see all of your equity separated by types and view the current account values as well as the potential benefit values.
- Sellable shares and exercisable holdings make up the current account values while unvested holdings will be represented in the potential benefit values.
- Informational icons are available to see how values are being represented and calculated.
Remember, whatever type of equity you have, there could be tax implications at conversion (RSUs), exercise (stock options), or at sale (all types of holdings). Be sure to understand the tax impacts at different stages of your equity’s life. While the taxes, commissions and fees on your equity holdings due don’t impact the value of your shares, they will impact the amount of your net proceeds you have access to.
3. Have a strategy for your awards when they vest
Most equity awards take months or years to vest, so you have time to build a plan for that moment. You may consider holding the shares at vest with the hope that they will grow in value, selling automatically on vest day, or a combination of the two.
As you weigh your options, you may want to consider your outlook for the stock and the broader markets as well as your financial goals and the timeline for achieving them. There is no single right answer: the best option is always what works best for your personal situation. (And whichever approach you choose, don’t forget to consider the tax implications)
4. Remember to consider diversification
After working at one organization for several years and receiving equity compensation, the amount of company stock you own may become a significant portion of your total financial holdings. Even if you are optimistic about your company’s prospects and the value of the stock you hold, you may want to consider limiting the amount of your portfolio that is allocated to it.
5. Integrate your equity award into your financial strategy
Your equity holdings can work alongside your income, savings, and investments to help you reach your financial goals.
For short-term goals: You may consider integrating your vested shares or shares that you already own into your investment planning whether it’s to save to buy a home or car, taking that bucket-list family vacation, renovating your home or just setting up a “rainy-day” fund. Another potential consideration to sell shares is to pay down debt, such as student loans, credit cards, or your mortgage. Remember, the amount of time you own your shares can impact your tax treatment when you sell them. Be sure to speak to a tax professional so you understand the tax impact of any sale you’re considering.
For long-term goals: Consider letting shares grow in your portfolio may generate funds that allow you to pay for your children’s or grandchildren’s college, plan for your retirement, or leave a legacy for those you care about.
The bottom line
Equity compensation can be complex but understanding how it works can help you unlock the financial possibilities it offers. And once you understand it, you can create a plan for using it to support your financial goals. Having a plan can also help you avoid making emotional decisions and taking unnecessary risks when your company’s stock price fluctuates or there is volatility in the broader markets.
1. “Employee Ownership by the Numbers,” National Center for Employee Ownership, March 2021. https://www.nceo.org/articles/employee-ownership-by-the-numbers