Employer Stock and Equity Compensation Plans

Employer Stock and Equity Compensation Plans

All right. I’m super excited about this segment. Today we’re going to talk about employer stock and equity compensation plans. So this is something that really we never used to see. But coming out of Covid, we have a lot more people working remote and they’re working for larger companies. A lot of these companies have had IPOs where they’re now publicly traded and a big part of compensation for a lot of these employers is stock for that employer.

Now, this may not apply to you, but it may apply to your kids, your grandkids or other family members. So pay attention. And if they’re in a situation where they work for a publicly traded company, this is probably going to be something that that’s relevant to them. So what are equity compensation plans? Well, there’s a few different types.

There is use or restricted stock units. There’s your traditional stock options plans. And then there’s these ESPP employer stock purchase plans. So all of these work a little bit different. All of them though have tax consequences that we want to be aware of. But the main thing is employers a lot of times now when they get to bonus time, instead of giving cash rewards to individuals, they’re giving them shares of that company, which is great because you get to benefit in that company’s success.

However, if that company isn’t doing very well, you also don’t benefit from that company’s success. So I’m gonna use my wife as an example. She works for a tech company out of California. Every year she gets a large stock award, which that might sound great. Well, if I pulled up the performance chart of her company, you’d notice it’s been going straight down.

So it’s great that we get these awards. However, when they’re a large percentage of our compensation plan and that stock isn’t doing well, well, that’s not really helping us out financially. So I recently met with an individual, went into retirement, have a large sum of money all in their employer stock. Now again, they’re benefiting from the success of that employer.

But if that company doesn’t do well you have so much concentration risk there. We want to be thinking about is proactively maybe starting to de-risk that portfolio. Not necessarily going to cash but diversifying away from just that one company. Now you might say, okay, that company is a phenomenal company. We want to maintain ownership. That’s okay. But we want to think about is maybe leveraging that for other income pieces okay.

And when we’re looking at RSUs, the stock options or these stock purchase plans where they all have these different pros and cons. Or maybe we’re buying stock at a discount, what we want to avoid is being too concentrated. So we want to sit back as think to ourselves, all right, do I really want 70 plus percent of my liquid net worth in one stock?

Probably not. That would be very risky. So we want to be thinking about how can we proactively then start to de-risk this portfolio, add a little bit more diversification. But of course we have to kind of overlay that with taxes. So this is where we kind of take a pause. So if we’re using RSUs or if we’re using a stock purchase plan you know we’re looking at stock options.

All of these work a little bit different tax wise. And we need to be careful in how we’re using them. Okay. When we’re looking at these different pieces of the portfolio they’re going to have consequences. You know. So if we’re looking at them inside of our 401(k) versus if it’s in a after tax brokerage account, we want to be careful on how we’re exercising these options.

You want to be careful on on our vesting schedule and how we’re selling those issues, or our holding period requirement for these stocks that we purchase at a discount. All of them have a little bit different rules associated with them, and we want to be careful when we’re analyzing that equity compensation plan. If we’re going with the idea of de-risking it and getting a little bit more diversification, that we’re doing it more proactively tax wise.

So when we’re looking at equity compensation plans, this is something that’s continuing to grow. And we’re seeing it become large percentages of clients’ liquids net worths. You know a lot of people coming to our dinner events, we’ve seen large positions in their different employer stock plans and we want to be thinking about, well, what can we do today, not only to just diversify the portfolio, but as we diversify that portfolio, how does it impact our tax return?

Okay, that’s why we want to have a team that’s a wealth. We have a team. We have a tax team. We have the advisory team. I specialize in working with a lot of our clients on these different equity compensation plans. I encourage you to reach out to us, you know, even if you’re 20 or 30 years old and this is just starting to build up in your portfolio, the decisions we make today are going to impact our retirement.

I know that sounds corny. If it’s maybe 30 years down the road, this is why it’s important. Maybe for your kids or your grandkids. What we do today can have a massive impact long term, and how we position ourselves with these different equity compensation pieces. So the planning around those really starts today. We want to be thinking proactively how do we position ourselves.

How do we get the most diversified portfolio but also do it in the most tax efficient way? So I encourage you, please reach out to us if this is something that you or a family member has in their plan. We want to be thinking about again how we can use this and leverage it best of our ability.