Understand the terms and conditions of your equity compensation
Establish goals for how you intend to use your award income
Create a plan for your award designed to pursue your goals
Stock compensation can be valuable when it comes to your overall financial plan, but it’s critical that you fully understand your grants and have goals in place before vesting. This becomes increasingly important as your awards can represent a larger proportion of your overall wealth.
1. Understand Your Equity Compensation Plan
The first step in realizing the true value of your equity compensation is to fully understand the terms, conditions, and tax considerations. Equity compensation plans can vary widely in terms of award types, vesting periods, and potential trading restrictions. Read the details carefully to fully understand what you will receive, when you will receive it, and any restrictions or conditions that may apply. If you are unclear on the specifics of your equity compensation, contact your company’s HR department for clarification.
2. Set Your Goals
It’s natural to think of money from your stock plan differently from your regular salary. Equity compensation often has more uncertainty, with a potential payout that may be years in the future. Resist the urge to think of your stock plan as a virtual “lottery ticket” that might fund your next big purchase. Instead, include your equity compensation with your income estimates in your long-term financial planning and goal setting.
Common goals for equity awards include retirement, college tuition, houses, renovations, family legacies, and charitable donations. If you fund your everyday cost-of-living expenses with salary and savings rather than investments, it will help protect your lifestyle from stock price volatility. Clarify your use of equity compensation in relation to your wage income, 401(k), and savings.
Ready to take your company’s equity compensation plan to the next level?
Traditional financial planning often applies a cash-flow analysis to goal setting. For example, if you apply stock compensation to your retirement planning, you could start by answering the following questions:
- At what age do you want to retire?What is an ideal budget for your life in retirement?How much capital will it require?What percentage of that will come from stock compensation?
With the answers in hand, you and perhaps a financial professional will be better prepared to analyze the role played by stock awards and how they fit with your goals.
3. Make a Plan to Pursue Your Goals
Quantifying the eventual value of your stock plan can be challenging, but you can make investment decisions easier by defining in advance the events, dates, or stock price levels that will prompt specific actions with your equity compensation, such as stock option exercises or sales of company shares. (Here are some tips in case the volatility of your company’s stock is a concern.)
A decision flowchart can be helpful for implementing your financial plan. It should be based on action triggers that are both quantifiable and easy to monitor. Such triggers may include:
- Thresholds for your company’s stock priceEvents or dates (e.g., vesting, option expiration, retirement)Values determined by a formula, such as the Black-Scholes valuation model for stock options
When or if the value of your grants has risen enough to meet a financial goal (e.g., college tuition), your strategy might involve first exercising just enough options or selling just enough shares to fund that goal and then seeking to maximize the value of the remaining grants for the next goal(s). To that end, you may want to consider carefully monitoring quantitative data such as price, event, or formula metrics. If your equity compensation includes stock options, it may be best to develop a timing strategy for exercising stock options.
Review your plan periodically and adjust for any changes in goals and circumstances (e.g., market downturns, job changes, or new tax laws).
TD Ameritrade Financial Consultants can provide a complimentary goal-planning session to help you get started with a plan that uses your stock compensation to build your future.
You Don’t Need to Go It Alone
Talk to a TD Ameritrade Financial Consultant about the role equity compensation plays in your overall financial picture. We can get you connected to the right professionals to help you align your investment and wealth strategies with your goals.
This article was developed with input from myStockOptions.com.