Are you one of the 10 million U.S. employees of public companies who receives some portion of your pay in company stock? If you are, you may have wondered if your financial advisor, stockbroker or financial planner is trained to advise you on this important part of your income. The truth is that equity compensation is complex. Optimizing this benefit requires a sophisticated approach to financial planning. A relatively small fraction of advisors have the training and experience to advise executives and other employees about their incentive stock options, restricted shares performance shares or stock appreciation rights. A recent study showed that the more employee stock plan participants used planning, advice and diversification, the more appreciative of their plan benefits and confident of achieving their financial goals they were. Do you think you understand your company’s equity compensation benefits and how they can help you achieve your long-term financial goals?
5 Things You Should Know About Your Equity Compensation
Here are five questions about your equity compensation that you and your financial advisor should know the answers to. These should be incorporated into your short-term tactical planning as well as your long-term strategic financial plan.
- Do you understand forfeit value? You should know the potential value of the compensation you’d leave behind if you quit or changed jobs. This includes the time value of your unvested and out-of-the-money grants which, presumably, you’d want to replace if you could, at your new job.
- Have you had upside and downside leverage explained to you? Stock options involve leverage because of the way they are granted and priced. It’s likely, for example, that a 20% increase in the value of your company stock could produce a significantly greater increase in your equity compensation portfolio. Your advisor should be able to help you understand this risk/reward relationship so you can pay attention to this powerful phenomenon.
- When was the last time you calculated the remaining theoretical value (or “TV”) of each of your equity compensation grants? As grants age, you run out of time for significant appreciation. Knowing the remaining TV will help you decide when to optimally exercise. Can your advisor track this for each of your grants and inform you when the time is right? (For related reading, see: Get the Most out of Employee Stock Options.)
- Do you know how concentrated your wealth is? Together with leverage, concentration is the key to wealth-building, but it’s also the biggest risk to your net worth. Most advisors don’t really understand leverage. Having a tool for managing concentration risk is important to ensure you stay in your financial comfort zone. A structured plan for diversifying your financial holdings is a proven strategy for managing risk. Nowhere is this more important than with a plan that is entirely focused on one company’s stock. (For related reading, see: Portfolio Concentration: Why You Should Watch It.)
- Finally, do you have the tools to know at what company stock price you meet your personal financial goal? Long-term planning is about setting goals, monitoring progress and adjusting strategy as conditions change. You need to be able to monitor the dynamic effects to your net worth that are caused by market price movements and the receipt of new grants. Your company might provide you with some tools but most of these don’t incorporate all the components of your financial life.
The right financial advisor and the right financial plan can be valuable guides for you to use when you make decisions about your equity compensation. The right answers to common questions like, “When should I exercise my employee stock options?” “Which grant should I exercise first?” and “Should I hold my company stock or sell it?" depends on how your financial plan is structured to your tolerance for risk. You owe it to yourself and your family to be actively optimizing this powerful benefit.