Many workers enjoy access to a variety of workplace
benefits: retirement savings, insurance, and paid vacation, just to name a few.
But employees of some publicly held companies are offered another type of
benefit: stock-based compensation plans. By providing access to company stock
through various types of plans, employers can provide additional compensation,
performance incentives, and tax-advantaged investing – all while fostering a
sense of involvement (or “ownership”) amongst staff. As you might expect,
however, the world of stock-based compensation is complex; there are many types
of plans with varying features, tax rules, and restrictions. If you are a
worker with stock incentives, here are some things to keep in mind:
- It Takes All Kinds: Some plans are
centered around stock options – the
contractual right to purchase company stock at a specified price during a
specific time period. Some offer discounted stock for purchase by employees;
others simply grant stock to their employees – no strings attached. In some
cases, options or grants can be tied to company or employee performance – only
materializing when certain objectives or benchmarks are met. There are many
types of stock incentive plans. Learn about your plan by reading relevant
documentation and communicating with HR. See below for a list of common plan types and
- Watch Out for Taxes: Whether you’re
exercising an option, purchasing discounted stock, or receiving stock grants,
you can bet there’s a relevant tax consequence. With diligence and thoughtful
planning, you may be able to mitigate taxes. Work with your financial planner
or tax preparer to integrate your stock incentives with your overall tax
- The Basics Apply: Buying, holding, and
selling employer stock can feel different than investing in other companies.
Many of my clients report an emotional attachment or sense of
loyalty/obligation to their employer. My advice? The basics still apply. Be
mindful of taxes, avoid market timing, watch out for oversize/concentrated
holdings, stay diversified, and don’t let emotion cloud your judgement. Apply
the same rigorous investment mindset to your employer stock incentives that you
use with your overall portfolio.
- Follow the Rules: Employees need to be
mindful of company rules and regulatory limitations when trading employer stock.
Many companies have blackout
periods during which trading of stock is prohibited. Even outside of such
periods, workers should always be mindful of insider trading
– or leveraging “material nonpublic information” in their investment decision
making. Unsure of the rules and regulations? Seeking input from HR can provide
clarity as you navigate the process.
The Bottom Line
confusing, stock incentives are a great way to build wealth and improve your
financial health. Familiarizing yourself with the terminology, rules, and taxes
associated with your plan will benefit your ability to fully leverage this
unique opportunity. Stuck or confused? Contact
us. A brief consultation or financial planning
project can provide independent context and fiduciary guidance to help you
make an informed decision.
Here’s a quick guide to a few of the acronyms you’ll find in
the stock incentive landscape. Remember – each plan type features unique
characteristics and tax considerations. For more information, contact us.
ISO (Incentive Stock
Options): Options allowing employees to purchase stock at a specific price
during a specific time. ISOs have preferential tax treatment and are sometimes
called “Qualified Stock Options”.
NSO (or NQSO,
Non-Qualified Stock Options): Like ISOs, but with a less favorable tax
ESPP (Employee Stock
Purchase Plan): Employees purchase employer stock at a discounted price,
sometimes through payroll deduction.
ESOP (Employee Stock
Ownership Plan): A retirement plan allowing employees to own employer stock
within a qualified retirement
RSU (Restricted Stock
Unit): “Units” are granted to employees – each usually representing 1 share
of employer stock. Units convert to stock according to a timetable (or “vesting
schedule”), with shares sometimes withheld in consideration of income taxes.
PBRSU (or PRU,
Performance Based Restricted Stock Unit): Like RSUs, but rather than a vesting
timetable, units restrictions lapse according to the achievement of specific
performance objectives or goals.