How to Make Decisions About Your Equity Compensation Plans, Ep #97

Financial Symmetry: Balancing Today with Retirement

Does your place of employment offer an equity compensation plan? Are you one of the 76% of people who have not exercised their stock options or sold shares of their company stocks? Mike Eklund is back after a hiatus and he is jumping in with both feet. He dives deep into the nitty-gritty of equity compensation plans. Since this can be a complicated subject you may want to consult a financial professional before making any big decisions about what to do with your company stock options.

Watch corresponding Youtube video here.

Why do companies offer equity compensation plans?

Many companies offer equity compensation plans as a part of an overall hiring package. The main reason is to align the company and employees. If the stock price goes up then you make more money. These compensation plans can be a big draw when you are trying to decide where to work. There are 4 main types of plans offered by companies.

1. Employee stock purchase plans (ESPP)
2. Owning stocks directly
3. Restricted stock
4. Incentive stock options (ISO). These are non-qualified stock options.

It is important to know how these types of plans differ and what their advantages are. What kind of equity compensation plan does your company offer?

Don’t let taxes wag the dog

The biggest question of owning stocks is when to sell. Don’t let the taxes wag the dog means don’t let taxes impact your investment decisions. So many people choose not to sell a position simply because they don’t want to pay taxes on it. It helps if you understand how the taxes work in each situation.

If you own stocks outright for over a year and sell then that is a long term gain and you will be subject to capital gains tax at the rate of 20% at most. If you own for less than a year then it is considered a short term stock and is subject to a higher tax rate of 37%. In this case, you’ll want to own for over a year for the best result.

If you own ESPP stocks then it is important to know whether you hold a qualifying or disqualifying disposition. A qualifying disposition is better. It is tied to how long you own the stock. You’ll want to own for at least a year before you sell.

Restricted stock is taxable when it is vested. Although restricted stocks are pretty straight forward your financial advisor can really help you with saving money in taxes.

ISOs can provide significant tax savings but they have many requirements. They are more tax advantageous than nonqualified stock options. You have more control over when the tax event occurs.

Ask these questions of yourself to discover how much company stock you are comfortable owning

• What percentage of my net worth is tied to the company stock today?
• How secure is the company?
• How long do you plan to stay with the company?
• Are you willing to wait it out?
• Am I comfortable with the risk of owning a large share of company stock?
• Think about your limits. How will you feel when the stock rises or falls?

What can you do if you own a lot in company stock?

If you own a lot in company stocks you’ll want to lower your risk and make sure that you are protecting yourself from a potential downturn. You can use these tools to think about how to create a framework for making better investing decisions.

1. Purchase a put option. This will ensure the stock sells at an agreed-upon price.
2. Trading plans allow corporate insiders to diversify stocks through prearranged stock selling plans.
3. Gift it to a donor-advised fund
4. Gift the stock to family or friends.

Listen in to hear how you can use a combination of these strategies to help you decide what to do when you own company stock.

Outline of This Episode

• [4:17] Why do companies offer equity compensation plans?
• [7:25] Don’t let taxes wag the dog
• [14:26] What can you do if you own a lot in company stock?
• [19:51] Some important questions to consider

Resources & People Mentioned

• CNBC article on the risks of company stock options
• Things to know before exercising your stock options
• ESPPs and taxes

Connect With Chad and Mike

• https://www.financialsymmetry.com/podcast-archive/
• Connect on Twitter @csmithraleigh@TeamFSINC
• Follow Financial Symmetry on Facebook

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