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Equity Compensation - An Introduction Thumbnail

Equity Compensation - An Introduction

Many of my clients have equity compensation as part of their overall benefits packages. And because I’ve been seeing it more frequently, I thought I would start talking about it more. Plus, it can get rather confusing and isn’t always the simplest thing to make sense of.  And you know how I feel about the trends within my world of making things more complicated than they need to be.  So, let’s start breaking down equity compensation. If you don’t have equity compensation as part of your benefits package, don’t worry as many of the themes I will cover apply regardless.


Equity compensation, in its simplest form, are benefits employees receive that are connected to their company’s stock. This stock can be private or public, but for most people it is public stock.  There are many forms it can take, but the most common ones I see are Employee Stock Purchase Plans (ESPP), Incentive Stock Options (ISOs), Restricted Stock Units (RSUs) and Restricted Stock Awards (RSAs).


Holders of equity compensation MUST understand how the stock values connect to their compensation package.   Why? Well, we will cover it in more detail in future articles, but for now I will just mention terms like having a concentrated position and also not forgetting to participate in other retirement-focused programs such as your 401k plan. Basically, equity compensation isn’t a surefire guarantee to retirement success by itself. There are other investment issues to be aware of and to consider.


Taxes are a massive issue with equity compensation. Okay, to be fair, taxes are a big part of everything. Maybe that is why I constantly say – “It Isn’t What You Make. It’s What You Keep!”   Understanding the unique tax structure of equity compensation and also having the right tax professional is key. Not everyone understands that an 83b isn’t just another section of a big box store😉


Equity compensation plans are a wonderful part of your overall compensation package, at least in my humble opinion. Maybe I’m a little jealous as I don’t have one, but then again, I like being my own boss too much.  Regardless, these plans are a tremendous way to boost your retirement savings.  While other investment vehicles (401k, Roth IRA, etc) allow you to invest for the future, equity compensation plans allow you to directly participate in the success of your company. The goal is if your company does better then your equity compensation plans do better too.  I believe that is what they call a win-win.


Part of the reason I’m going to be focusing on equity compensation is because I’ve seen firsthand with clients this fact – these plans do not come with too many instruction manuals. I’ll be covering some of the basics and enough to get you heading in the right direction.


A couple of things with this. If you have certain equity compensation topics you would like me to try and address, just send me an email at dan@forwardthinkingwm.com.  Also, if you know a family member, friend, or coworker who has equity compensation, please pass these articles along to them. Better yet, just have them sign up for my email articles at www.forwardthinkingwm.com.