Some industries have increased equity remuneration in recent years. Equity remuneration helps companies recruit and retain top personnel, link key employees’ interests with the company’s, and develop an ownership culture.
Equity pay can help employees develop wealth and attain long-term financial independence if managed properly. Equity compensation plans are complicated. You’re not alone in feeling overwhelmed.
Three Employee Stock Option Types
Three of the most frequent equity compensation methods are restricted stock, employee stock purchase plans, and stock options.
Performance shares, restricted stock units, and awards are all restricted stock. Consider restricted stock as a cash bonus at a high level. Instead of money, you receive company stock that you’ll get later under specific conditions. These factors are usually time-based, but they can also be connected to personal, company, stock, or future transactions like an IPO, merger, or acquisition.
Employee stock purchase plans let workers buy business equity at a discount from fair market value. Though called equity compensation, ESPPs are not directly related to employee salary. Consider an ESPP a company-only “perk”. Employee participation is usually voluntary and open to anyone. ESPPs get payroll contributions. The cash accumulated after three to six months is utilized to buy firm stock at a discount using a formula that might vary greatly from plan to plan. There is no tax on ESPP shares at purchase, but taxation on sale is complicated and depends on holding periods and performance.
Stock options are unlike restricted stock and ESPPs. Stock options allow employees to buy company stock at a predetermined price, subject to a vesting schedule and expiration date. You buy company stock by proactively exercising your stock option. If your company stock goes well, unexercised stock options can provide a lot of leveraged upside, but if the stock price never rises above the date of issuance, they are worthless.
What Equity Compensation Strategies Build Wealth?
Equity compensation can be complicated, but you don’t have to close your eyes, act, and hope for the best. There are several good equity compensation concepts to follow. Important equity compensation techniques are listed below.
First, do your homework. Learn what you have, how it works, and what decisions need to be made. Review your company’s stock plan, grant agreements, and employee resources. Contact HR with follow-up questions.
Control concentration danger. Overinvesting in one stock might cause serious financial problems. This is especially true if your substantial stock stake is in your income-generating company. Anyone would struggle with being laid off. However, it is especially difficult when the business stock position you could have utilized to bridge the gap to your next employment is worth much less.
Understand the regulations, especially tax law. Understanding holding period rules can help you get better tax treatment. Learning about the Alternative Minimum Tax, when it applies, and how to plan is crucial if you have incentive stock options. Do what’s best for you in the most tax-efficient method, in that order.
Plan your investment. Ask yourself these equity compensation questions: Funding what goals and priorities using business stock? How much and when will you need each? Are you owning enough business stocks for your risk tolerance? Hold, sell and diversify, or sell and cash future vesting shares? How will a significant loss in firm stock value affect your ability to achieve your goals?
Finally, don’t imagine you can sell for more later. If your firm stock was worth more in the past, it may not be worth that much again. Interest rates, economic recessions, new laws and regulations, geopolitical events, and other things outside your control might affect stock performance.
Equity compensation has plenty to learn and consider, and emotions might cloud your judgment. A systematic, deliberate, and proactive approach to corporate stock management can help develop wealth and financial freedom.