In a competitive job market, equity compensation has become a sought-after benefit for many employees. According to a 2023 survey from Morgan Stanley, 72% of companies offer some form of equity compensation, up from 65% in 2021. These perks can motivate employees and help them achieve their long-term financial goals. However, despite its popularity, some employees “miss the opportunity” because they lack a clear understanding of how equity compensation works.
Certified financial planner Chelsea Ransom-Cooper, chief financial planning officer for Zenith Wealth Partners in New York, emphasized the importance of educating employees about equity compensation. Without a proper understanding, employees may not fully benefit from the opportunities presented by equity compensation packages.
There are three popular types of stock-based compensation that employees often receive: stock options, restricted stock units (RSUs), and employee stock purchase plans (ESPPs).
Stock options give employees the right to buy company shares at a predetermined price within a specified timeframe. This type of compensation is common in startup companies, where employers aim to create a culture of ownership and incentivize employees with the potential for significant financial gains. However, the tax implications of stock options can be complicated, depending on the type of stock options granted.
On the other hand, RSUs are company shares granted to employees upon hiring, which vest over time. These shares can also be tied to performance-based goals, making them a valuable part of an employee’s compensation package. Financial advisors often recommend establishing a target for holding company stock to avoid overexposure to a single asset.
ESPPs offer discounted company shares to employees through regular payroll deductions. While ESPPs provide an opportunity for employees to acquire company stock at a discount, they also come with risks, especially if the company’s stock price decreases after the purchase.
To maximize the benefits of equity compensation, employees should take a strategic approach to managing their stock-based awards. Financial planners recommend diversifying investments and setting clear goals for stock holdings. Selling company stock at the right time can help employees lock in gains and manage risks effectively.
In addition, employees should prioritize their financial goals and consider factors such as employer matching contributions to retirement accounts before participating in ESPPs. While equity compensation can be a valuable part of an employee’s overall compensation package, it’s essential to have a solid understanding of the benefits and risks associated with each type of award.
By educating themselves about equity compensation and working with financial advisors to develop a comprehensive financial plan, employees can make informed decisions about their stock-based compensation and optimize their long-term financial success.
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