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Equity Compensation: Beyond Benefits

With the right planning, your equity compensation can be a cornerstone of your financial future.

You’ve taken all the right steps to manage your wealth. You’ve identified your most important financial goals and built a plan to pursue them. From asset allocation and retirement savings strategies to charitable giving and generational planning, you’ve worked hard to make sure your wealth is working for you today — and for your family in the years to come.

So, what are you missing? The answer may lie in your company’s equity compensation plan. This workplace benefit can be crucial to your long-term financial goals. Incorporating equity compensation into your overall financial plan can help you maximize the benefit of this valuable executive perk. Over time, that strategic approach may supercharge your efforts to reach long-term financial goals. What’s more, your contributions to your company’s success are reflected in your executive compensation plan: As the company’s stock value increases, your wealth also grows – as long as you’ve proactively managed your plan.

Incorporating your executive compensation into your financial plan isn’t just about upside. It also can help you avoid costly mistakes. By failing to properly manage stock options or preferred stock, you run the risk of missing out on the considerable value of those benefits. Consider that a laissez-faire approach might shrink a potential six-figure sum into just enough for a moderately priced family vacation.

Here’s what you need to do to help make sure your executive compensation fuels the drive toward your financial goals – not just toward a budget hotel chain:

Go over your equity compensation plan in detail

Your equity compensation represents an ownership stake in your company. That can be a great boon to your finances, but to make the most of it you’ll have to do your homework.

First, you have to understand exactly how your plan works. Does it entitle you to shares of company stock, or does it give you the option to purchase shares at a discount? What are the unique rules, tax implications and liquidity challenges that affect how you can benefit from these shares? Stock options, for instance, usually come with an expiration date. If you miss the opportunity to exercise your in-the-money stock options prior to their expiration, you might lose out on what could have been a sizable profit.

You don’t have to figure everything out on your own. Ask your company’s HR department for all the relevant materials for your equity compensation plan. Then, we can meet to go through the fine print. You’ll learn not only the rules of your plan, but also what those rules mean for you.

Make a timeline of actions you need to take

You have to know your plan’s schedule – such as when you’ll receive your shares and how long you have to wait before selling them, or when you can exercise your options and when those options expire. That timeline will help you decide how to get the most out of your equity compensation and how it all fits into your larger financial plan.

It can be tempting to let your equity benefits pile up for you to deal with on some vague future date. But putting it off can get you into trouble. For example, say you’ve been accruing stock options for years without exercising them, and now you want to leave your job for a better one. You’re faced with a choice between exercising all those options at once (which may be prohibitively expensive) and forfeiting them.

Instead, make a plan to manage your equity compensation on a regular basis – say, quarterly or annually. It helps ensure that you’re taking full advantage of your plan’s benefits. It also makes it easier to see those benefits in the context of your overall savings and investment plan.

Timing also matters when it comes to buying and selling your shares. A methodical approach can help. For example, choosing to buy or sell shares when the stock hits certain price targets over time can be an effective strategy to help you regularly meet your financial milestones.

Don’t let company stock dominate your portfolio

It’s a great thing when your equity compensation adds up to a sizable chunk of your net worth. At the same time, it might not be prudent to have a disproportionate amount of your wealth invested in one stock. Take a step back and consider how these benefits fit in with the rest of your long-term investment plan. You may find opportunities not only to mitigate risks, but also discover other opportunities to help you reach your financial goals more quickly and thoughtfully.

Reach out to your Baird Financial Advisor to discuss opportunities to build a thoughtful plan that incorporates your equity compensation into your pursuit of your most important financial goals.

The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.