It is no secret that the markets have been volatile for investors over the past 12 months. It can be especially worrisome for employees who hold concentration in one stock – specifically, their employer stock, which involves certain rules. Here are five key reminders of what a prudent investor should look for regarding stock compensation in volatile markets:

  1. Review your financial plan. In times of volatility, we come back to the master plan. If the road never had bumps, we wouldn’t need a plan; however, financial planning is important because we know those bumps will occur. Your financial plan should incorporate not only the good times, but the volatility that life throws at us.
  2. Diversification is key in volatile times. Your stock compensation through your employer is a wonderful perk and can help you feel proud to be a part of the company, but don’t rely on it as your only source of wealth. Remember, your wages are likely already coming from this company, so adding in your stock concentrates your investment in one company. Diversifying your stock will help decrease risk and allow you to have other options available to you during volatile periods.
  3. What’s your leverage? If you have vested incentive stock options or non-qualified stock options, you are able to choose when to exercise the right to purchase them. Think about what you are leveraging. If the exercise prices are close to what you see in the open market, you don’t have much leverage. In addition to evaluating the leverage, what is the trajectory of the company? We don’t have a crystal ball, but is it realistic to believe the stock will grow substantially?
  4. Taxes. Because stock compensation is a form of compensation, you are taxed on the income, so pay attention to the type of stock compensation you have. Incentive Stock Options, or ISOs, have holding requirements and are subject to Alternative Minimum Tax. They may require some extra planning around their complexity. Non-qualified stock options operate differently and are taxed on the spread between the fair market value when you exercise and the grant price. Restrictive and performance stock are tied to timing and/or performance and do not allow you much say on when you will be taxed. Your accountant and financial advisor can help you review the tax consequences for the current year and project your tax exposure for future years.
  5. Know the rules. Plan documents are key to helping you understand your options when it comes to stock compensation. What happens if the company sells or if you are laid off? Are there certain windows of time the options need to be exercised and/or sold? Make sure to review what will happen to your stock and when.

Your financial advisor, accountant, and company HR team can help decipher these options and what will work for your specific plan. Stock-based compensation can be complex, so lean on your team of professionals to guide you.

Author Teryn A. Fitzgerald Financial Advisor

Teryn has been involved in the financial services industry since 2009. She is a member of Cents of Self, an initiative that inspires, informs, and empowers women to pursue their best financial futures.

About Savant Wealth Management

Savant Wealth Management is a leading independent, nationally recognized, fee-only firm serving clients for over 30 years. As a trusted advisor, Savant Wealth Management offers investment management, financial planning, retirement plan and family office services to financially established individuals and institutions. Savant also offers corporate accounting, tax preparation, payroll and consulting through its affiliate, Savant Tax & Consulting.

©2023 Savant Capital, LLC dba Savant Wealth Management. All rights reserved.

Savant Wealth Management (“Savant”) is an SEC registered investment adviser headquartered in Rockford, Illinois. Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments and/or investment strategies recommended and/or undertaken by Savant, or any non-investment related services, will be profitable, equal any historical performance levels, be suitable for your portfolio or individual situation, or prove successful. Please see our Important Disclosures.