The role and makeup of equity compensation programs within the life sciences industry continues to evolve.
According to data from consultants at Willis Towers Watson, the percentage of companies that are granting stock option awards has declined from 66% to 40% over the past ten years, perhaps due to their higher-risk nature. Today, most companies are embracing long-term, performance-based incentive plans.
Yet stock grants and stock options remain key components within many employers’ compensation packages. The primary challenge for many life sciences professionals is how to integrate equity compensation into their overall financial plan.
Here are a few tips that may help you make smart decisions:
1. Understand what kind of investor you are. Whether you are accumulating wealth for milestones such as a college education for your kids or a vacation home, or even if you are financially independent, these factors will alter your decisions about the risks you can take, how to diversify your portfolio, and your need to generate cash flow.
2. Understand the tax consequences of your investment decisions. Incentive and non-qualified stock options are treated differently when it comes to taxes. You should look at whether you own restricted stock units (RSUs) or restricted stock – those differ as well. In short, understand how taxes impact you!
3. Understand the impact of recent tax law changes. The Tax Cuts and Jobs Act of 2017 changed how the alternative minimum tax (AMT) is calculated and will also affect owners of incentive stock options (ISOs). Income exemptions and the levels at which AMT income exemptions start phasing out have been increased. This means that fewer people will be subject to the AMT as a result of exercising ISOs.
4. Watch out for concentrated wealth. Employer-issued stock can lead to risky concentrated stock positions. Therefore, learn to diversify and use the appropriate strategies for long-term wealth accumulation. This may mean simply selling company shares, hedging your position, or donating shares to charity.
Consider the overall role that equity compensation plays within your financial life, identify your core values, and establish clear financial goals. Once you have these pieces of the puzzle in place, it will be easier to make the right decisions about how to manage your equity compensation.