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By Joe Vietri
Although equity is an increasingly common form of total workplace compensation, many employees do not realize its full value.
In fact, in a recent Schwab survey of 1,000 residents in the San Francisco Bay Area, one third said they receive equity as part of their overall workplace compensation.
Yet fewer than half believe it will make them wealthy, and nearly 70 percent say they would cash out either some or all of their equity compensation as soon as it becomes liquid, suggesting that many are not thinking about equity compensation as part of a longer-term wealth plan.
Misconceptions about equity compensation
There are a number of misconceptions around equity compensation, and there’s a clear need for more education. As an employer, you are well-positioned to educate employees about how equity compensation works and the valuable role it can play in helping employees accumulate wealth over the long term.
Here are some considerations you can communicate to your employees when it comes to equity compensation:
1. Start with a plan
Successful wealth management strategies usually begin with a comprehensive financial plan. This process involves understanding risk tolerance, setting financial goals and creating a roadmap to achieve those goals through saving and investing.
In the context of broader short- and long-term financial goals, employees will be better prepared to analyze the role that equity compensation should play in helping reach those goals.
2. Know the triggers
There are different scenarios or triggers when it may or may not make sense to sell or hold company stock once it vests. For example, one may want to sell some company stock or exercise options based on when the price of the underlying stock reaches a certain value or when there is a vesting event.
Financial consultants can work with clients to make a basic decision flow chart of if/then statements to help them make more informed decisions and take the right actions. When those types of triggers occur, this pre-planning can make it easier to determine what course of action makes the most sense.
3. Understand the tax implications
It’s a good reminder that people should consult with a tax professional to make sure they understand the tax implications when it comes to different kinds of equity compensation. This can be complicated, and people should ask questions to ensure they’re making informed decisions.
4. Think about equity compensation as part of a broader wealth portfolio
Employees should think about equity compensation as part of an overall financial plan and as a component of a broader investment portfolio. If employer stock represents more than 20 percent of an overall equity portfolio, it might make sense to reduce the allocation and diversify the portfolio.
For example, if the value of the employer stock increases, an employee could sell stock or exercise some options and sell the stock to get back to an appropriate target portfolio allocation.
Establishing an exercise strategy can be challenging, and working with a professional can help an individual make decisions that both minimize the tax liabilities and maximize the benefits in order to build wealth and stay on track toward longer-term financial goals.
Equity compensation is a valuable component of a total workplace compensation package, and it makes sense for you to help your employees fully realize this important benefit.
Joe Vietri has been with Charles Schwab for more than 20 years. In his current role, he leads Schwab’s branch network, managing more than 2,000 employees in more than 300 branches throughout the country.