How To Make the Most of Your Equity Compensation

When it comes to workplace benefits, health insurance and 401(k) plans may be among the most desired—but the often-misunderstood equity compensation plan can also be highly valuable.

When you know how your company’s stock plan works, you may be able to more effectively incorporate equity compensation into your broader financial toolkit and use it to help achieve your goals.

If you’re among the millions of Americans with access to some form of equity compensation, here are five considerations to help you 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, as one more opportunity your employer has provided to help you potentially generate proceeds and build wealth.

2. Know how to value your equity compensation.

Just as you can quantify your salary and how much you might earn in a bonus or commission, you should aim to understand 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 are some factors and calculations to consider:¹

3. Have a strategy for your awards when they vest.

Most equity awards take months or years to vest, giving you some time to build a plan for that moment. Some people hold the shares at vest with the hope that they will grow in value, some sell automatically on vest day, and some do a combination of the two.

As you weigh your options, 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. (Whichever approach you choose, don’t forget to consider the tax implications. A tax advisor can help you with this step.)

4. Consider diversifying.

After working at one organization for several years and receiving equity compensation, company stock may represent 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 own, you may want to consider the amount in light of your broader portfolio.

To protect against concentration risk, some people build up other types of investments over time, using a bonus, cash from equity compensation sales, tax refunds or liquid savings. Others sell some of their company shares to make those holdings a smaller portion of their overall net worth.

5. Integrate your equity awards into your financial strategy.

Your equity holdings can work alongside your income, savings and investments to help you reach your family’s financial goals.

For short-term goals: Some may consider using vested shares to help cover the costs of major expenses like buying a home or a car, taking a bucket-list family vacation, renovating a home, or funding a side venture. Another reason some sell shares is to pay down debt, such as student loans, credit cards or a mortgage.

For long-term goals: Some investors let shares grow in a portfolio to generate funds that could pay for a loved one’s college, leave a legacy or better plan for retirement. For those aiming for an early retirement, equity compensation may help bridge the gap between the time they stop working and the qualifying age for retirement plan distributions and Social Security.

Remember, the amount of time you own your shares can impact your tax treatment when you sell them, so be sure to speak to a tax professional in order to understand the tax impact of any sale you’re considering.

The Bottom Line

Equity compensation can be complex, but understanding how it works can help you unlock the financial possibilities it has to offer. And once you understand it, you can create a plan for using it to support your goals. Having a plan can also help you avoid making emotional decisions and taking unnecessary risks if, for example, your company’s stock price fluctuates or there is volatility in the broader markets.

If you’re unsure of the best way to use your equity compensation to help you meet your financial objectives, or about how it can impact your taxes, know that you don’t have to figure it out on your own. Professionals like Financial Advisors and accountants can help.

Footnotes

¹ These considerations do not take into account any taxes.