Equity Compensation vs. Cash: What To Know

If your company offers equity compensation, you might be wondering, why can’t I just have a larger bonus in cash instead?

It can help to understand why the company wants to award you stock in the first place. In other words, what’s in it for them? Equity awards are a way to encourage you to stay at the company. They make you an owner, meaning that the work you do directly ties to your own financial success. And when your goals are aligned with your company’s, you may feel more connected to your work.

But it can sometimes be tough to get a sense of the full value of your equity awards, especially when compared to the clearcut value of a cash bonus (or even an increase in your paycheck). To start, it’s important to know that there are different types of equity awards that your company can provide. Knowing exactly what you hold can help you understand the rules and tax treatments of your specific awards.

Make sure you carefully review the award agreement provided by your company, which will include details that are unique to your awards, such as the type of awards you are receiving and if you need to accept the awards. If you have questions, you can reach out to your company’s equity plan manager. Your company may also offer free education sessions to help walk you through the details of your equity awards.

Here are three key factors to keep in mind when comparing your equity awards to cash: 

1) Timing and Taxes

While a cash bonus is paid out at a specific time (often at the beginning of the calendar year), there are additional factors that go into the timing of when you receive your equity awards. Many awards come with a set vesting schedule, which can either be a specific period of time that you need to remain at the company for or may be tied to the company’s performance, meaning that you won’t have access to the full value of your equity awards right away until that criteria is met.

Plus, the ability to sell your company stock will have to follow any company-specific insider trading policy requirements, meaning that you may only be able to sell company stock during open trading windows, typically if you are close to material non-public information, also known as MNPI.

And then there are taxes to consider. Taxes on your equity compensation can be more complex than the ones on your regular paycheck, as the tax treatments can vary based on the types of awards you have and how long you’ve held any shares you receive from them. You may wish to speak with a professional, like a tax advisor, to discuss the specifics of your awards and their tax impacts. 

2) Growth Potential

The biggest draw of equity compensation may be that it has the potential to gain value over time. While when it comes to cash, $100 is $100, the value of 100 shares of company stock will change if there is a change in the company’s stock price. So the value of your equity awards could grow if the company’s value does, meaning that your company stock has the potential to outpace your standard bonus.

And remember, that potential growth starts on the award’s grant date, not the date of vesting. Plus, your awards may be eligible to earn dividends or dividend equivalents, which can accrue over time.

3) Risk

The flip side of this is that there’s no guarantee you’ll see outsized returns, or even any returns at all, on your equity compensation. There are real risks to keep in mind because if the company stock drops, so will the value of your equity awards.

Holding company stock has the potential to be a great source of wealth creation. However, being overly concentrated in one stock can have outsized risk, so don’t forget that you may want to diversify your assets.

Additionally, if you’re locked into a long-term vesting schedule, you might need to stay at the company for a certain amount of time for the awards to vest so you can get the full value of your awards, even if you have another opportunity that comes your way. 

The Bottom Line

Whether or not you hold equity awards, you want your overall compensation to be able to support your financial goals—from paying for your kids’ education expenses to building up a nest egg for retirement—so it’s important to understand what you get from your company and what it’s worth.

With equity awards, you get to participate in the value that you worked so hard to create, which can potentially be a game changer when it comes to your finances. But there are also risks and nuances to keep in mind. A professional, like a Financial Advisor or a tax advisor, can help you make sense of how your equity awards can fit into your broader financial picture.