Untangling Employer Stock Incentives

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: 

  1. 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
    related acronyms.
  2. 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
  3. 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.
  4. Follow the Rules: Employees need to be
    mindful of company rules and regulatory limitations when trading employer stock.
    Many companies have
    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

 While sometimes
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
. A brief consultation or financial planning
can provide independent context and fiduciary guidance to help you
make an informed decision.


For Example:

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 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”.

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
“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.

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.

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