What Should You Do With Employee Stock?

Mark Riepe (0:10)

I'm Mark Riepe, I head up the Schwab Center for Financial Research, and this is Financial Decoder, an original podcast from Charles Schwab. It's a show about financial decision-making, and the cognitive and emotional biases that can cloud our judgment.

If you work for a company that offers equity compensation, or you want to know more about it, this is the episode for you. Stick around to learn how to get the most out of your plan, or how to evaluate a potential employer's plan.

To kick things off, let's look at how prevalent these plans are. Overall, as of 2022, there are some 25 million workers in the US who have some form of an ownership stake in the company they work for with just over $2 trillion in plan assets. That includes things like employee stock ownership plans, also known as ESOPs, Equity Compensation Programs and Employer Ownership Trusts. Employee equity compensation is a big part of the financial system. In fact, it's even bigger than those numbers suggest because the US stock market has increased substantially in the years since those numbers were first calculated. Equity compensation can be a way for companies to attract and retain employees. It can also help create a work culture where employees think and act like owners. And obviously, it's a way for employees to benefit financially above and beyond a paycheck. In today's episode, we're going to look behind the numbers and pick the brain of an expert on employee compensation. And Sarah Buchardt is just the person for the job. She's a workplace financial consultant and certified financial planner. She's helped employees at places like Google and Broadcom navigate their stock plans, workplace benefits, and general financial planning.

So Sarah Buchardt, welcome to the show.

Sarah Buchardt (1:52)

Thank you for having me.

Mark Riepe (1:54)

I think you're on a couple years ago. That's, I think, if I remember correctly, maybe talking about 401k. Is that right?

Sarah Buchardt (2:00)

Yes, yes.

Mark Riepe (2:01)

Okay, fantastic.

Before we dig into a little bit of the ins and outs of equity compensation, you know, financial services, there's so much jargon. What do we mean by equity compensation?

Sarah Buchardt (2:14)

Yeah, so with equity compensation, it's really just when a company is choosing to pay its employees with shares of company stock.

I think compensation is a really fascinating topic because people can get really creative with how they attract and retain talent. People are familiar with the salary or their hourly wage as the foundation, but they also take into account things like healthcare benefits, bonuses or commissions, maybe some good food options on campus, vacation policies. And so equity compensation is like one of those items and all of those pieces play a part in making a job attractive and compelling.

Mark Riepe (2:55)

So if I'm a new employee and this is something that's being, or maybe even an existing employee, and this is something that's being offered, what should I as an employee ask about, think about, you know, just so I can understand a little bit better, what in fact I'm being offered?

Sarah Buchardt (3:11)

Yeah, initial questions around equity compensation are probably the same questions that you have about your paycheck. What, when, and where? So what is being offered to you? What type of equity compensation is coming your way? We'll go into some examples later, but the different types of equity compensation have different decision points and tax consequences. So it's good to know what type is being offered to you.

When do these shares come to you? So shares often have some kind of timeline or vesting schedule that determines when the shares or the options are actually released to you. So when are you actually eligible to get those shares? Then where? So where do these shares get deposited? This is often with a brokerage firm like Charles Schwab.

So you'll be prompted to open an account with a specific company or administrator so that you can actually receive the shares at the right time. So to summarize, what type of equity did you receive? When do you get access to that stock? And where does it actually get deposited?

Mark Riepe (4:26)

There are a lot of ways that employers can compensate employees. This is just one of many. What makes us attractive to two employers in the first place?

Sarah Buchardt (4:37)

Well, the hope is that this is aligning everybody's interests. So stock is ultimately partial ownership of a company. So when a company does well, the stockholders should also do well.

This is quite a simplification of a lot of economic concepts. But the hope is that this is going to not only inspire, but also reward employees for good work that aligns with the company's goals and missions.