The use of employee stock options has grown in
popularity as a means of attracting higher-level employees and instilling a
sense of pride in them about their employer. It is estimated that the number of
employees who own stock options has increased nine-fold since the late 1980s,
according to the National Center for Employee Ownership.
Having the ability to purchase company stock at a predetermined price at a later date through the use of stock options can be a significant part of your overall remuneration. For the best results, it's necessary to understand how they function and how they're regarded for tax purposes in order to make the most of them.
It is advantageous to have a stock option because it gives you the ability to buy shares at a fixed price in the future, regardless of the current market value. To execute your stock options, you must adhere to a vesting schedule that specifies how many shares you are eligible to purchase on particular days.
Keep an eye on the Expiration Date.
Stock options expire after a certain period. Typically, a vesting schedule lasts from one to four years, but certain individuals may have up to ten years of vesting time available to them. For example, if you are laid off or quit or retire from the company, you may only be able to access your stock options for 90 days.
In the event that you have options that are still in the money, it is in your best interests to act quickly before the expiry date approaches. Others simply ignore deadlines in the hopes that the value will rise even further, while others simply fail to make judgments at all. However, this method has the potential to backfire.
As soon as the stock is trading over the exercise price, it may be time to take advantage of your option's expiration. Having your options expire and become worthless is the absolute last thing you want to happen.
Maintain a Diversified Investment Portfolio
Nothing could be better than a hefty stock option compensation package. However, you run the danger of having all of your money invested in a single stock, which is a huge disadvantage.
It is recommended that you do not have more than 10% - 15% of your portfolio invested in a single company on a general basis. Because of your lack of diversification, you wouldn't be able to weather a downturn should the company run into difficulties.
If you're approaching that threshold, you may want to consider selling some of your stock each year to protect your nest egg from excessive volatility risk. Even for large quantities, consider breaking the sell into several smaller transactions over a period of time to account for market changes. It is possible to use that additional income to enhance your IRA and 401(k) contributions in the future.
To Sum It All Up
Including employee stock options in your compensation plan can be a significant addition to your overall compensation package, particularly when you work for a firm whose stock has been performing well recently. Please take advantage of your rights as soon as they become available, and make sure you understand the tax implications of your decisions to reap the maximum benefit from them.