For many years, the allure of stock awards has drawn in countless corporate employees, offering the potential for wealth and a sense of company loyalty. Surveys, such as those undertaken by Charles Schwab, reveal that a large majority of employees consider equity pay to be highly important, with half viewing it as a non-negotiable benefit when looking for jobs. However, relying heavily on stock pay can pose serious risks that are often overlooked. In some instances, accepting a cash bonus or setting up a robust retirement plan may be a wiser choice for future financial security.
The psychological appeal of stock compensation is undeniable. It offers a real sense of ownership and the possibility of acquiring significant wealth. However, it also comes with risks and potential financial traps that many employees fail to anticipate. These include the volatility of the stock market and the potential for significant tax liabilities. In times of economic downturn, reliance on stock pay can lead to loss of both income and savings.
Financial experts recommend diversification and tax planning to mitigate the risks associated with stock pay. They suggest that employees should sell restricted stock and restricted stock units as they vest, and exercise only small amounts of incentive stock options each year. Keeping a healthy cash reserve for emergencies is also advised.
Moving forward, it is expected that companies will provide employees with more choices in terms of the proportion of their pay that is made up of stock, cash, and bonuses. However, regardless of the potential gains from stock compensation, financial professionals caution against over-reliance on equities for savings, and strongly advocate for a balanced and strategic financial plan to ensure long-term financial stability.