If you know the terms RSU, ISO, NQSO, and ESPP, then it’s likely that you’ve been offered – or you’re enrolled in – an equity compensation plan at work. If you’re the kind of person who looks at a list of financial acronyms and immediately tunes out, believe me you’re not alone. Don’t ignore your RSU or NQSO, though, just because it seems complicated.
I’m not a fan of acronyms myself, so I like to start by spelling things out. Here’s what we’re talking about:
Restricted stock units (RSUs) are company shares provided by your employer as part of your compensation that are subject to vesting. Once your shares are vested, you may owe income tax on the stock value.
Employee stock purchase plans (ESPPs) allow you to purchase company stock, often at a discount. ESPPs may have holding requirements that affect tax treatment.
Nonqualified stock options (NQSOs) give you the right to buy company stock at a set price after a vesting period. NQSOs don’t qualify for special tax treatment. They’re taxed based on the difference between the exercise price and the market value.
Incentive stock options (ISOs) are employee stock options that may qualify for favorable tax treatment if specific conditions are met.
Of course, there’s a lot more to know about how these compensation plans work. And I’m not the one to teach you. I do know, however, that if you’ve got an equity compensation plan or if you’re being offered one as part of an employment package, you should talk to a professional about what that means for your overall financial picture. Here are some things you should get advice about:
Negotiating your compensation: An employer will always put the most positive spin on a compensation offer, including projections of future value. But you should get an objective assessment to understand how it will impact you based on where you are in your career and your current financial needs.
Preserving your cash flow: Your financial planner can help you put together a budget that takes into account the fact that some of your income will be placed in stock and deferred until after vesting. Remember, you still need cash to pay monthly bills.
Balancing risk: Despite your dedication to your employer or partnership, excessive concentration of any single stock can put you at risk if the company falters. When you’re earning equity compensation you’ll need to pay particular attention to frequently rebalancing your portfolio.
Exercising options: Your financial planner can help you decide on the best strategies for exercising stock options and selling shares to maintain diversification, minimize risk, and comply with regulations.
Understanding tax consequences: You should keep your tax advisor in the loop about any action you’re taking with an equity compensation plan. They can help you understand the tax consequences of participating in a plan, exercising or selling shares, and what happens after vesting.
Companies are fans of equity compensation plans because they give employees a personal stake in the business. Paying employees in stock can also help the company preserve cash they can invest in other initiatives. It’s important to keep in mind, though, that holding stock means you’re betting on the long-term health and growth of your employer. Only you know how much of a bet you’re ultimately willing to make – an important discussion to have with your Arrivity financial planner.
Things to think about with an equity compensation plan:
- Regardless of the company’s history, stock ownership is risky and your employer is already crucial to your financial stability since they provide your income and benefits. There’s a chance that your stock won’t pay out if the company hits hard times.
- If you’re looking at a new job with an equity compensation plan, be sure you’re talking about it with your spouse, because only the salary portion will be available for the household budget.
- Your financial planner can guide you on how best to manage your equity compensation and its impact on your cash flow and taxes.
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Liz is a Late Boomer in the sandwich generation who started an independent writing and brand consulting practice after years as a senior marketing executive. She lives in Seattle, Washington. Her mother lives nearby and her daughter is a recent college graduate.
The foregoing content reflects the opinions or perspective of Liz Behlke and/or Arrivity financial planners and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful. Arrivity does not give tax or legal advice. Tax and/or legal strategies should be discussed with a professional before implementing.