Managing Your Equity Compensation Through Market Volatility

It’s natural for emotions to run high in times of rising inflation and turbulent markets —but letting those emotions drive your investment decisions can derail your long-term plans. As you evaluate your options for managing your equity compensation, here are several considerations to help keep you grounded.

Take a Deep Breath—And a Historical Perspective

Some degree of market fluctuation is par for the course. History tells us that after a downswing typically comes a recovery. So, while it may be nerve-wracking to see a drop in your company’s stock price, a correction or rebound may bring it back on track.

Pay Attention to the Type of Equity You Have

Different types of equity compensation present different opportunities and challenges with market volatility:

• Restricted Stock: Restricted stock/restricted stock units have intrinsic value at vest, whether or not the company stock price stays flat or drops after the grant date (unless it drops all the way to zero).¹ Therefore, they tend to bear less market risk than stock options. 

 

• Stock Options: Stock options carry more market risk, as their value is connected to the relative price of the exercise or strike price of the option and the market price of the stock at the time of exercise. And it’s important to remember that if the stock price is down at vest, there’s a possibility it will rise again before the options expire.

 

• Employee Stock Purchase Plan (ESPP): If your company’s stock does decline, you might consider the lower price in determining whether to purchase additional shares through the ESPP.

 

Keep an Eye Out for New Grants

Policies vary by company, but some employers will issue new stock option grants when the share price has dropped significantly. Options granted during bear markets may be beneficial, since your exercise price can be lower than the stock’s usual trading range.²

In addition, some companies with particularly volatile stocks issue grants at regular intervals rather than all at once, and some grant a mix of options, restricted stock and performance shares.²

Protect Your Short-term Needs

Your equity compensation can support a range of financial goals, like buying a home, financing your children’s education or retiring on your terms. But given the variable timelines for vesting and the potential for fluctuation in value, you may want to consider relying on other sources of income, such as your salary, to cover basic needs like food and housing. It’s also generally a good idea to build up an emergency fund, so you can pay for the essentials even if your regular income stream is interrupted.

Seek Professional Guidance

Markets are complex, even for savvy investors. There are professionals who can help you understand the potential impact of volatility on your specific equity awards and guide any decisions you might be making about them. Volatility can also leave your desired asset allocation out of whack; a Financial Advisor can help you manage your concentration of company stock relative to the rest of your portfolio with an eye toward diversification.^* A tax advisor is also a great resource for understanding how an exercise or sale can impact your tax situation at any given time. 

The Bottom Line

Volatile markets may cause some investment anxiety, which may be heightened if part of your compensation is made up of company stock. It helps to keep a long-term focus and not let day-to-day stock movements play too large a role in your decision-making. Keep in mind, a common reason companies provide equity compensation is to foster a long-term relationship between you and your company, based on a mutual investment in each other’s success.

For personalized help in navigating the uncertainty, reach out to financial and tax professionals with special knowledge of equity compensation.

Footnotes:

¹ myStockOptions.com, "Can You Calculate Whether It Is Better to Be Granted Stock Options or Restricted Stock/RSUs?" Accessed February 22, 2024. Available here (may require login): https://www.mystockoptions.com/faq/index.cfm/catID/C35F65EE-CC74-43FD-B57440A874920970/ObjectID/94E040B5-FB13-46E1-A81C4D2959BD0118(opens in a new tab).

² myStockOptions.com, "How to Stomach Volatility in Your Company's Stock Without Losing Your Mind." Accessed February 22, 2024. Available here (may require login): https://www.mystockoptions.com/articles/stomach-volatility-in-your-companys-stock-without-losing-your-mind(opens in a new tab).