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Fitting Equity Compensation into Your Financial Plan

equity compensation
The smartest move when granted equity benefits is to plan now, not 10 years down the road.

A growing trend in employee benefits is the inclusion of equity compensation to attract the best talent and to recognize top employees. Equity compensation is a form of non-cash compensation that represents ownership in the company, such as stock options or restricted stock. Depending on the company and the type of compensation they provide, employees will either receive company stock upon joining the team or the option to purchase it at a future date into their employment.

Equity compensation can seem complicated, and it may be tempting to let your benefits sit on autopilot, especially if you plan on staying at the company for a while and don’t have immediate plans to sell the stock. This might not be the best move, however, because equity compensation can come with unique tax rules, tax implications, and liquidity challenges. In order to ensure that you’re making the most of these benefits, it’s important to take a strategic approach to manage them and work to incorporate them into your broader wealth management plan. As you do so, keep the following questions and opportunities in mind.

What are your long-term financial goals?

One of the best ways to ensure that you’re making the most of your equity benefits is to revise your financial plan when the benefits are granted, not years down the road. Sit down and assess your current financial situation, your personal goals, when you’d like to see them realized, and how much money you’ll need to make those goals happen. There’s a good chance that your equity compensation could influence those goals.

Here are some questions to keep in mind as you plan:

  • When exactly will you gain ownership of company stock? If you are given stock options, you won’t own shares until you exercise an option to purchase the stock. If you are given restricted stock, you may be issued shares of stock right away or in the future. However, you won’t be able to sell them until a vesting date.
  • How long do you foresee yourself staying at the company? What happens to your stock once you leave?
  • Do your equity benefits expire? If so, when?

Getting a handle on these questions will help you know how to best move forward.

How much risk can you afford with your investments?

Despite the fact that your tolerance for risk may change over time, it’s important to focus on your current risk tolerance for your present financial situation. Typically, young investors tend to have the ability to be more aggressive in their investment strategies as they work to build their wealth through more risky investments. Older investors, on the other hand, could be approaching retirement and may have a lower tolerance for risk at this phase of life.

Keep in mind that planning for the unexpected is a significant part of this process. For example, what would happen if the company you work for continues to grow and succeed but the stock price simultaneously drops? How might a big decline in the company’s stock price impact any vested or unvested shares you have? How comfortable are you with volatility in the value of your equity benefits? The answers to these questions can help you fully understand what your risk tolerance might be.


SEE ALSO: Understanding the Pros and Cons of High-Risk Investments

What are your liquidity needs?

When we’re talking about liquidity needs, we are referring to how much money you need to cover everyday expenses, any upcoming purchases, and any unexpected bills that may be looming in the distance. Your liquidity needs may be fairly high if you have shorter-term goals, such as paying down student loans or buying a home.

If you’re planning to depend on your equity compensation to help you achieve future goals, it’s crucial that you plan ahead. How much stock you sell and when you sell it will depend largely on your future liquidity needs.

Are you incorporating price targets into your strategy?

It may be tempting to exercise all of your equity benefits at one time, but that might not be the smartest option. In fact, one of the best things you can do to strengthen your financial plan is to incorporate multiple stock prices or price targets that will determine when you can take a specific action. Using this approach provides you the opportunity to benefit from rising stock prices while simultaneously protecting your assets from downside risks.


SEE ALSO: FSA vs HSA: How to Make the Most out of Your Employee Benefits


Additionally, it’s important to consider the tax implications that come with utilizing your equity benefits. For instance, if you exercise all of your options at once, then you run the risk of rising into a higher tax bracket where you can be hit with a larger tax bill. A great way to reduce your tax exposure is to establish a deliberate and thoughtful approach when exercising your equity benefits.

Is your portfolio diversified?

Having a diversified portfolio means that you have investments in various areas of the market, whether that’s in different stocks, sectors, investment vehicles, or some other measure. Having too much invested in any one stock leaves you vulnerable to heightened risk. This risk doesn’t go away even if the stock is in a company that you’re familiar with, such as your employer. Though diversification isn’t a foolproof measure to protect you against financial hits, it can be an incredibly beneficial part of the planning process.

Concluding Thoughts

Equity compensation is more than a nice-to-have employee benefit. It can also be a significant planning opportunity to set you up for future financial success. The best way to ensure that you’re making the most of your equity benefits is to sit down with a professional financial advisor to make a plan that fits your personal situation.

Here at Paces Ferry Wealth, we are dedicated to helping our clients thrive financially and achieve their short-term and long-term goals. If you would like help incorporating equity compensation into your long-term financial plan, please don’t hesitate to contact us today.


Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”).  This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.

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