What Market Volatility Means for Your Equity Compensation

Rising inflation and turbulent markets can, understandably, lead to heightened emotions—but letting those emotions drive your investment decisions isn’t always for the best. When it comes to managing your equity compensation through these volatile markets, here are some considerations to help you stay grounded.

Take a Deep Breath—And a Historical Perspective

Some degree of market fluctuation is par for the course. History tells us that after a downswing typically comes a recovery. So, while it may be nerve-wracking to see a drop in your company’s stock price, a correction or rebound may bring it back on track.

Pay Attention to the Type of Equity You Have

Different types of equity compensation present different opportunities and challenges with market volatility:

• Restricted Stock: Restricted stock/restricted stock units have intrinsic value at vest, whether or not the company stock price stays flat or drops after the grant date (unless it drops all the way to zero).¹ Therefore, they tend to bear less market risk than stock options. 

 

• Stock Options: Stock options carry more market risk, as their value is connected to the relative price of the exercise or strike price of the option and the market price of the stock at the time of exercise. And it’s important to remember that if the stock price is down at vest, there’s a possibility it will rise again before the options expire.

 

• Employee Stock Purchase Plan (ESPP): If your company’s stock does decline, you might consider the lower price in determining whether to purchase additional shares through the ESPP.

 

Keep an Eye Out for New Grants

Policies vary by company, but some employers will issue new stock option grants when the share price has dropped significantly. Options granted during bear markets may be beneficial, since your exercise price can be lower than the stock’s usual trading range.²

Protect Your Short-term Needs

Your equity compensation can support a range of financial goals, like buying a home, paying for your children’s education or retiring on your terms. But given the variable timelines for vesting and the potential for fluctuation in value, you may want to make sure to cover basic needs like food and housing with more stable sources of income, such as your salary. It’s also generally a good idea to build up an emergency fund, so you can pay for the essentials even if your regular income stream is interrupted.

Seek Professional Guidance

Markets are complex, even for savvy investors. There are professionals who can help you understand the potential impact of volatility on your specific equity awards and guide any decisions you might be making about them. Volatility can also leave your desired asset allocation out of whack; a Financial Advisor can help you manage your concentration of company stock relative to the rest of your portfolio with an eye toward diversification.^* A tax advisor is also a great resource for understanding how an exercise or sale can impact your tax situation at any given time. 

The Bottom Line

Volatile markets may cause some investment anxiety, which may be heightened if part of your compensation is made up of company stock. It helps to keep a long-term focus and not let day-to-day stock movements play too large a role in your decision making. Keep in mind, a common reason companies provide equity compensation is to foster a long-term relationship between you and your company, based on a mutual investment in each other’s success.

For personalized help in navigating the uncertainty, reach out to financial and tax professionals with special knowledge of equity compensation.