By Brandon Miller, CFP–
I’m not sure how many leprechauns live in the Bay Area, but many people seem to have found the pots of gold the wee folk are rumored to leave at the end of rainbows. (And we know there are a lot of rainbows around here.)
With so many high-end employers competing for a talent-rich workforce, hiring incentives can be pretty rich. One of the most popular perks is company stock, probably because it generally works in the organization’s favor to give you a share in the company versus guaranteed salary.
Employers have several different ways that they can dangle a stock benefit in front of you. If you’ve been lucky enough to be offered one, you’ll want to think about how to optimize it. Here are three popular stock incentives and my suggested ways to leverage them:
Employee Stock Purchase Plans (ESPPs)
Suggested Strategy:
Grab and Go
ESPPs allow you to buy your company’s stock at a discount—usually 15% less. You choose how much to deduct from your paycheck. Then every six months or at set periods, the plan invests your accumulated amount in company stock at the discounted rate.
Fabulous. You just made 15 cents on every 85 cents you saved. It’s a rare investment that offers a guaranteed return like that, so it makes sense to squirrel away as much as you can or as much as the law allows in your ESPP.
Here’s the catch, though. That 15 cents per dollar is only yours if you sell your shares immediately. Hold on to them hoping the value will rise and you risk the stock price dropping and wiping out your free money. Plus, your cash is tied up for another six months when you could be investing it elsewhere.
If you don’t get greedy, ESPPs are a brilliant way to make lots of money on your money. But the immediate sell-off is key. As my father always told me, pigs get fed; hogs get slaughtered.
Restricted Stock Units (RSUs)
Suggested Strategy:
Vest and Vamoose
RSUs are a form of compensation that you only receive if you stay long enough for the units to vest. Many companies make a large RSU grant when they hire you with a vesting schedule of four years or so. Stay that long and the stock is yours. Leave early and you may only get a fraction, or nothing. You may also be offered smaller grants each year to encourage you to stay on board.
Once RSUs vest, the shares are yours to buy and sell. Distributions are taxed as ordinary income based on the value of the shares at the time of vesting. That part is key. It means that if you hold onto your shares hoping the stock market will continue its unending rise, you could find yourself paying higher taxes on lower value if the share price drops when you cash out. And there’s no preferential capital gains treatment for holding onto the investment for a year.
So, bearing in mind my dad’s wisdom about pigs and hogs, you might be smart to sell as soon as your shares vest.
Employee Stock Options (ESOs)
Suggested Strategy:
Bide Your Time
ESOs give you the right to purchase a specified number of the company’s shares at a set price for a predetermined amount of time. That may sound like a mouthful, but it’s a totally no-lose proposition. Let’s say your grant enables you to buy up to 1,000 shares at $10 for the next 10 years. You aren’t obligated to buy anything, so if the stock never rises above $10, you haven’t shelled out a dime. On the other hand, if the stock shoots up to $25, you make out like a bandit.
Timing and market factors, plus your age, financial status, and goals all enter into optimizing ESOs. You likely don’t want to learn all the ins and outs of nonqualified and incentive options, or run a Black-Scholes model yourself, so I highly suggest turning to a financial professional if stock options are part of your compensation package.
If you have any of these stock incentives, you can stop chasing rainbows and searching for four-leaf clovers. You already have a pot of gold. Just be strategic about how you capitalize on it.
The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. Brio does not provide tax or legal advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always, please remember that investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
Brio Financial Group is a registered investment adviser. SEC Registration does not constitute an endorsement of Brio by the SEC nor does it indicate that Brio has attained a particular level of skill or ability. Advisory services are only offered to clients or prospective clients where Brio Financial Group and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Brio Financial Group unless a client service agreement is in place.
Brandon Miller, CFP®, is a financial consultant at Brio Financial Group in San Francisco, specializing in helping LGBT individuals and families plan and achieve their financial goals.
Published on March 12, 2020
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