Equity Compensation Plans Build Loyalty but Uncertainty Abounds

Many plan participants are unsure about selling shares

Stephen Miller, CEBS By Stephen Miller, CEBS February 26, 2018

Employees who participate in equity compensation plans that grant company stock as incentive pay understand the long-term value of the benefit—but many are afraid of making a mistake when exercising employee stock options or selling shares, new research shows.

More than one-third of plan participants (36 percent) said equity compensation is one of the main reasons they took their job, based on newly released results from a September 2017 survey by investment firm Charles Schwab. The findings are based on 1,000 interviews with equity compensation plan participants who receive incentive stock options or restricted stock awards or who participate in employee stock purchase plans (ESPPs).

Building Wealth

According to Schwab's Equity Compensation Plan Participant Survey, the average total value of participants' stock compensation was $72,245 last year, and approximately two-thirds of participants were fully vested.

When asked for the top reasons why they value equity compensation, most respondents cited the opportunities for building wealth and to participate in company growth.

18-0315 Equity Compensation-01.jpg

However, just 24 percent have exercised employee stock options or sold shares that are part of their employee stock holdings. Fear of making a mistake is a concern for nearly half (48 percent). 

Among those who had not exercised or sold their equity compensation or ESPP shares, uncertainty about selling at the wrong time or triggering taxes were common concerns.

"Tens of millions of Americans participate in employee stock programs and most recognize their importance, but many are unsure of how to maximize their value," said Marc McDonough, senior vice president, Schwab Investor Services. "When managed correctly, equity compensation can play a meaningful role in building wealth. The survey made it clear that employees would benefit from more help in understanding the role this benefit can play in their long-term financial plan."

[SHRM members-only toolkit: Designing and Managing Incentive Compensation Programs]

Promoting Loyalty

The survey also found that:

  • Employees see the long-term value of the benefit. Three-quarters of participants consider equity compensation as part of their long-term financial plan, and 63 percent say their employee stock helps them feel more prepared for retirement.
  • Equity compensation plays a large part in employee loyalty. Eleven percent say they would not consider leaving for another job because of their equity compensation, and 28 percent say they would not consider joining a new company until after the next vesting event at their current job.

Baby Boomers and Generation X employees were most likely to consider employee stock as part of their long-term plan, while Millennials were more likely to expect to use their employee stock soon.

Planning Ahead

"Multi-year planning is especially valuable with equity compensation," noted Bruce Brumberg, the editor-in-chief of myStockOptions.com, an online resource for equity compensation information and tools.

A recent blog post on his website advised that, before selling stock compensation shares, plan participants should consider:

  • Their financial situation, including short-term cash needs that may prompt them to sell company stock or exercise options.
  • Whether their decisions should be tax-driven.
  • The outlook for both the company's stock price and their job.
  • How comfortable they are with their concentration in company stock and whether they should diversify their equity holdings.
  • Multi-year projections for their income and taxes.

Related SHRM Articles:

Company Stock Plans Are a Valued Benefit, but Risks Should Be Understood, SHRM Online Compensation, September 2016

For Stock-Based Pay, HR Can Help with Next Year's Taxes, SHRM Online Compensation, April 2016

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