Incentive stock options, non-qualified stock options, restricted stock units, and employee stock purchase plans are some of the more common forms of equity awards. It may automatically be part of your compensation, or it may be an optional benefit that you can choose to participate in.
Equity compensation and equity benefits tend to have more risk, illiquidity, and uncertainty in comparison to a salary. What's more, this part of your compensation is taxed differently than your paycheck and each type of equity awards is subject to different tax rates.
Speak with your financial advisor and tax consultant about ways to mitigate your tax implications. Equity awards can be overwhelmingly complex which makes it difficult to know what action should be taken with them and how they should be used, as part of your financial plan, along with your other assets and income.
If you aren't familiar with the specific rules, tax implications, and actions you need to take regarding your equity awards, you might not be getting the most out of a benefit that can make up a significant portion of your overall annual compensation.
Share the details of your equity compensationplan with your financial advisor. A few key details for you to confirm include the enrollment period; whether there is a contribution minimum or maximum; whether your employer matches your contributions, or offers a discount on the shares you purchase; the award date, which performance metrics must be met, if any; the vesting schedule; and, the tax implications.
If your equity compensation plan is optional, these details will be helpful as you work with your financial advisor to weigh the pros and cons of participating in your employer's equity compensation program.
If interest in your company's stock is part of your compensation automatically—meaning you don't have to decide whether to participate in the program—or if you've already decided to participate in the plan, these details are necessary to consider when integrating these resources into your overall investment strategy.
Determine the role the equity awards will play in your financial plan. What you do with your equity awards depends on your personal needs and objectives.
There are three main ways to extract value from your equity awards: to fund a near-term need; build a safety net for emergencies; or invest for a long-term financial objective, such as retirement.
Taking the time to identify your objectives will make it easier for you and your financial advisor to determine how the equity awards should be positioned in your financial plan to help you achieve those goals. And, make sure you revisit this approach whenever there's a life change.
Monitor the amount of your wealth that's held in your company's stock. Regardless of how you plan to use equity awards to meet your financial objectives, be mindful of the amount of wealth that you have tied up in your company's stock relative to the rest of your assets.
A concentrated stock position in your portfolio can be a risky proposition, but this risk is heightened when it's stock in a company that pays your salary. Your financial advisor can help you build diversification around a concentrated position, and can help you protect your financial success against the threat of an idiosyncratic risk to the business.
Read the report A checklist for your work benefits 27 September 2021.
Also download the one-page checklist to help you to navigate your work benefit decisions.
Main contributors: Ainsley Carbone and Justin Waring
This content is a product of the UBS Chief Investment Office.