Equity compensation is a way for employers to reward employees with company shares; this is in addition to your paycheck and other benefits and is usually intended to incentivize you to stay with the company for an extended period and contribute to the firm's overall success. There are a variety of award types including options to purchase shares, stock appreciation rights (SARs), restricted stock, performance shares, or grants that pay in cash at the time of distribution.
Equity can be a significant part of your benefits package—providing a valuable asset to help you plan for your financial goals and potentially building wealth. For Executive Services participants who are offered equity compensation by their employer, it's essential to understand how company stock can affect all aspects of your financial picture, both short- and long-term.
Here are some ways your company equity could help you meet your financial goals:
Higher potential gains
Equity compensation can cause concentration or other investment risks, but can also be highly lucrative, especially when you work for a company whose stock price is expected to perform well over the term of the awards.
Immediate cash flow
Once equity compensation vests, you can apply the value of these awards toward short-term cash flow needs or use the cash from selling company stock to increase contributions to longer-term savings goals.
Tax management
Taxes are always a concern for equity compensation participants. Although some awards are taxed at vesting, you can decide on holding or selling their shares for long- or short-term capital gains treatment. Further, vested stock options are taxed at exercise, allowing you to have control over the timing and the amount of the grant to be taxed. Some participants will develop a plan to be taxed over several years by spreading out the dates of exercise.
Charitable gifting
When donating shares that have increased in value to a qualifying charity, the donor can avoid paying capital gains taxes that would otherwise be triggered if the stock was sold for a profit. In fact, the donor can claim a charitable deduction on their federal income tax return (subject to IRS limits) equal to the fair market value of the securities at the time of the gift.
Although equity compensation can play a significant role in helping to meet financial goals, it can also be complex and, without the right attention, could potentially result in a loss of profits. Some potential risks associated with equity compensation include:
- Not planning for taxes can affect cash flow. Most equity compensation awards will be taxed at a federal "supplemental” rate of 22%. If your effective tax rate is higher, you will owe the difference when you file annually.
- Holding significant amounts of company stock can increase your overall portfolio volatility. Concentration in your employer's stock can build wealth quickly when the price appreciates significantly, but your holdings can also lose value more quickly if the stock price declines.
- Leaving the company may require you to forfeit some or all of your equity compensation.
Planning for equity compensation is not a onetime event. Your dedicated Executive Services team can help you plan over time, helping to ensure that you understand all aspects of your company's equity compensation including the details of your employer's Employee Stock Purchase Plan (ESPP), tax implications of buying and selling employer stock, and even more specific scenarios such as handling stock option awards during a divorce.