- Not evaluating your company stock could leave your investment portfolio's allocation out of whack.
- A recent study shows only 24 percent of workers have ever exercised their stock options or sold shares they received through equity compensation.
- Experts say it's important to evaluate your company shares in conjunction with your goals and overall financial plan.
Got stock options at work and have no idea what you should do with them? Join the crowd.
A recent survey from Schwab Stock Plan Services shows most employees — 76 percent — have never exercised their stock options or sold shares that are part of their equity compensation. Close to half (48 percent) said they've held off due to fear of making a mistake.
While it could make sense to hold onto company stock depending on your situation, be aware there's risk that comes with not evaluating whether or not to unload them.
"You can end up having your assets heavily concentrated in one area – your company's stock," said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York. "How comfortable would you be if it takes a dive and a large portion of your net worth is tied to it?"
An estimated 28 million workers participate in some form of equity ownership, according to the National Center for Employee Ownership. It comes in the form of stock options, restricted stock or employee stock purchase plans, among others. Overall, employees now control about 8 percent of corporate equity.
The Schwab study shows that the average value of an equity compensation plan is $72,245, although not all of those workers are fully vested yet (more on what that means below). The median value — half are above and half are below — is much lower: $21,000.
While it's common to have little understanding of how this part of your compensation works, it's worthwhile finding out in order to make the most of it.
"Not enough people are sitting down … to figure out how their company stock fits into their overall portfolio," said Marc McDonough, senior vice president at Schwab Investor Services.
While the specifics of stock plans vary, here are some key things to know.
Generally speaking, whether you're receiving stock options or restricted stock, your employer is giving you the right to purchase company shares at a certain price at a certain future date. The employer's goal is partially to keep you from job-hopping.
That future date could be based on length of employment or based on reaching performance or financial goals. Be aware that there can be expiration dates attached to these awards, so make sure you know if there's a deadline to take advantage of the granted equity.
Typically, you face a delay between when you are awarded stock options or restricted stock and when you are fully vested. This is the point when you can exercise your right to purchase the shares. Leave the company before then, and you'll likely forfeit any unvested options.
Taxation of stock options depends on what kind you have, and how long you hold those options before selling them. There are incentive stock options (which must meet specific rules under the tax code) and non-qualified stock options (pretty much everything that isn't an ISO).
For non-qualified stock options, generally speaking, you pay taxes when you exercise those options, based on the difference between the so-called exercise price — the amount you were promised you could buy the stock for — and the fair market value at that time. That difference is taxed as ordinary income and subject to payroll taxes, and gives you an adjusted taxable basis of that fair market value.
Say you are awarded 100 stock options worth $50 per share ($5,000 total) and you exercise the options when they each are worth $100 ($10,000 total). You would pay tax on the difference, or $5,000 (your gain).
Then when you sell the shares, you'll have either a short- or long-term capital gain or loss based on the difference between that adjusted basis and the sale price. For short-term gains, you pay your ordinary income tax rate. For long-term gains, the tax rate is either zero percent, 15 percent or 20 percent, depending on your annual income.
Restricted stock is taxed differently from stock options and it can get even more complicated. Generally speaking, however, when those shares vest, it is considered compensation and you are taxed at your ordinary income tax rate. If you hold on to them for a while, you would incur capital gains taxes for any difference between the vested price and what you sold it for.
Tax is typically withheld by your employer in both cases, although the methods are slightly different.
"It doesn't mean it's the right amount withheld, but it's a good safety net," said Boneparth of Bone Fide Wealth.
Before you do much of anything with your company stock, you should put it in the context of your full financial picture.
"This is not a standalone thing," said Schwab's McDonough. "It's part of your overall portfolio and you have to consider the two together."
Many experts recommend having no more than 10 percent or 20 percent of your assets in any one investment. The idea is that if one specific stock or asset tanks, it won't entirely upend your portfolio.
More importantly, though, you should consider your financial goals and how owning your company's stock fits into that.
For instance, if one of your goals is to have more cash reserves, maybe selling some of your shares to pad your cash funds is a good idea.
Or, perhaps you're saving for retirement or financial independence and investing is stocks is part of how you plan to get there.
"Ask yourself if having company stock is the best way to invest," Bone Fide Wealth's Boneparth said. "Owning a bunch of company stock might not be the best way to do that."
In that case, you could sell some company shares and invest it in other stock.
McDonough at Schwab also said too many employees are winging it. The Schwab survey showed that two big reasons for employees to sell were because they needed cash (35 percent), or wanted to make a large purchase (28 percent).
"Those reasons are reactive," McDonough said. "We want people to be proactive in their approach and have a plan in place for their stock options."
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