Equity compensation is one of the most valuable—and misunderstood—benefits. Here’s how to ensure it helps you meet your financial goals.
When it comes to workplace benefits, health insurance and a 401(k) match are among the most desired, but the often misunderstood equity compensation plan can also be highly valuable.
When you understand how your company’s stock plan works, you can more effectively incorporate equity compensation into your broader financial toolkit and use it to help achieve your goals.
If you’re among the 20+ million Americans1 with access to some form of equity compensation, here are five ways you can potentially 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. It’s 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 know the exact value of your salary and how much you might earn in a bonus or commission, you should aim to know 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’s how to do it:
3. Have a strategy for your awards when they vest
Most equity awards take months or years to vest, so you have 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. (And whichever approach you choose, don’t forget to consider the tax implications!)
4. Remember to diversify
After working at one organization for several years and receiving equity compensation, the amount of company stock you own may become 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 hold, you may want to consider limiting the amount of your portfolio that is allocated to it.
Protect your wealth by building up investments in other companies or funds over time, using your bonus, cash from equity compensation sales, tax refunds, or liquid savings. You may even consider investing in causes that are meaningful to you. Alternatively, you could sell some of your company shares to make those holdings a smaller portion of your overall net worth.
5. Integrate your equity award 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: Consider using any vested shares or shares that you already own to help you cover the costs of major expenses like buying a home or a car, taking that bucket-list family vacation, renovating your home, or funding your side hustle. Another potential reason to sell shares is to pay down debt, such as student loans, credit cards, or your mortgage. Remember, the amount of time you own your shares can impact your tax treatment when you sell them. Be sure to speak to a tax professional so you understand the tax impact of any sale you’re considering.
For long-term goals: Letting shares grow in your portfolio may generate funds that allow you to pay for your children’s or grandchildren’s college, leave a legacy for those you care about, or better plan for your own retirement. If you’re planning an early retirement, equity compensation may help bridge the gap between the time you stop working and the qualifying age for retirement plan distributions and Social Security.
The bottom line
Equity compensation can be complex, but understanding how it works can help you unlock the financial possibilities it offers. 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 when 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, rest assured that you don’t have to figure it out on your own. Professionals like Financial Advisors and accountants can help.
Learn more about equity compensation and how it can fit into your financial strategy.