We love seeing equity compensation as part of a financial plan. When handled properly, equity compensation can be a great way to accelerate personal wealth and meet goals, however they can also result in out of balance investment diversification.
Basic types of equity compensation a company may offer include the following:
Stock Options – The company says you can purchase a stated price of shares at a defined price. They are vested over given period (or automatic triggering event, like sale of company or performance goals being met). When vesting is met, you can “exercise” the stock option at their stated price until it expires. Ideally the company stock increases in price and you are able to purchase below market value. These can be incentive stock options or nonqualified stock options which is discussion for another blog post!
Phantom Stock – A company looking to further incentivize or bonus an employee may utilize phantom stock as a means of compensation. These are often cash and sometimes stock bonuses that can be paid at or over a specified period. The value is determined by the increase of stock price. Instead of a date of settlement, the employee may be able to “exercise” once a vesting schedule is reached. Phantom stock could offer dividend equivalent payments.
Stock Appreciation Rights (SARs) – SARs are very similar to the phantom stock above. SARs however would not offer dividend equivalent payments. Depending on the company’s dividend yield this could drastically affect the amount of compensation. They are treated more like an
option in their accounting. Companies may use phantom stock or SARs as a form of retirement plan as opposed to a “bonus.”
Restricted Stock – Companies can give employees the right to purchase shares at market price or a discount (or even at no cost)! However, you cannot utilize them until vesting or other parameters are met. Restricted Stock Units (RSUs) technically fall into this bucket, however are
governed by different accounting rules. It is important to understand tax implications and options when it comes to restricted stock compensation and plan ahead to make the best use out of this compensation.
Employee Stock Purchase Plans (ESPPs) – These programs technically are not “equity compensation,” but rather a means for employees to further invest in their companies’ stock. They can be qualified or non-qualified plans. Employees can take money from their paychecks periodically and this money is used to purchase employee stock at a specific time at a specific discount. There is a one year/two year holding period (one year after purchase date and two years after the start of an offering period) in order to qualify for special tax treatment.
Making decisions on equity compensation is not always easy. We encourage you to examine the data (taxes, long term benefits and growth, etc.) and your feelings on the company’s stock and how it works into your financial plan. Psychology teaches us that the emotional side of our brain tends to win out in our financial decision making which means we need data-driven guidance on how we feel about these decisions to help us make the appropriate choice at the time.
Julia works with women in the sales profession to help identify and reach their financial goals. Schedule with Julia for an initial consultation.
Investment advisory services offered through LW Advisors, a Registered Investment Advisor in the state of Iowa.
