How Your Company Stock Plan Benefits You

It wasn’t long ago (the late `90s, actually) that workers by the hundreds were becoming enviably wealthy through dot-com stock options. While those days of fast fortunes might largely be behind us, employee stock ownership plans, which make owners of all or most of a company’s workforce, can still provide a nice boost to compensation.

Stock ownership (otherwise known as equity compensation) plans come in a variety of forms, with some companies offering more than one type of opportunity to their employees.

Types of Plans

Restricted Stock Units (RSUs):

Restricted Stock Units (RSUs) represent an employer’s promise to grant employees one share of stock per unit based on vesting requirements or performance benchmarks. An employee receives the shares when they vest. Because this is taxable income, often the employer will sell the number of shares needed to cover the income and payroll taxes, thus giving the employee a tax basis on the remaining shares equal to the value of the shares at the time of vesting (vesting date price). The employee is not deemed to own the actual shares until vesting and does not have voting rights.

Because taxes have been paid on the shares when they’re received, short or long-term capital gains tax will be owed on the difference between the selling price and the vesting date price when the shares are sold.

Employee stock purchase plans (ESPPs):

An ESPP gives employees of public companies the chance to buy their company stock (usually through payroll deductions) over a specified offering period at a discount of up to 15 percent off the market price.

As with a stock option, after acquiring the stock, the employee can sell it for a profit or hold onto it for a while. Unlike with stock options, the discounted price built into most ESPPs means that employees can profit even if the market value of the stock has gone down a little since it was purchased.

Employee stock ownership plans (ESOPs):

An ESOP is similar in some ways to a profit-sharing plan. Shares of company stock are allocated to individual employee accounts based on pay or some other measure. The shares vest over time, and employees receive their vested shares upon leaving the company.

Employee stock options (ESOs) and related plans:

A stock option gives an employee the right to purchase a specified number of shares at a fixed price for some period in the future. For example, if an employee has a vested option to buy 100 shares at $10 each and the current stock price is $20, they could exercise the option and buy those 100 shares at $10 each, sell them on the market for $20, and make $1,000 profit. If the stock price never rises above the option price, the employee would simply not exercise the option.

Early on, companies gave stock options only to “key” employees (often to just the executive team). These days, many companies that give options extend them to all or most employees.

Keep in Mind

Equity compensation may not always be a sure road to the country club life, but company equity still offers great potential for financial reward. Just be sure that any company stock you own fits into your overall financial strategy. A good rule of thumb is to avoid having more than 10% in any one individual stock, so your investments are diversified. Consider contacting your personal financial coach to further discuss how these plans can play a part in achieving your financial goals.

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