Stock Compensation

How To Derive The Greatest Benefit From Stock Compensation

Stock compensation has become one of the most common ways for corporations to reward high performing executives when their share prices rises on the back of a strong performance. The system confers tax benefits on the corporation and the individual, depending on the exact terms of the stock options. This is because the government is aware of the need to create some degree of stability in a workplace which is constantly changing. People move from job to job, and even from state to state, far more than they did in the past.

When a company is about to launch, it needs a way to be able to recruit the people it needs to achieve long term success. For any top quality manager, a move to an unproven start up operation involves a degree of risk, so there must be something to compensate for this. Any extra payment of cash would involve dissipation of resources right at the time when a company can least afford it, so a good option is to offer something which not involve any expense until later.

Stock based compensation is ideal in this respect, especially if it is in the form of stock options which remove all of the risk completely. If a company does not perform in the way everyone was hoping, the share price will simply never rise above the level set on the gifted options. In this case, no-one will exercise the options because they are effectively worthless, only conferring the right to buy stock at a price greater than that available in the open market.

The system is equally attractive to executives looking for a new challenge in the corporate world. If they did not believe that the company would succeed, they would simply go somewhere else, so they are looking at the options as a sound investment for the future. If you are prepared to take a more long term view, the stock options can be a very sound investment, and can also make you feel more a part of the organization you work for. You can benefit for a long time to come if you manage your investment properly.

It is always tempting to take stock compensation and spend it straight away, especially if you are a young executive with a young family setting up home. That temptation should be resisted if possible, as it means you are pulling up a possible money tree by its roots. If you can set a stop loss point below market value to minimize the risk, you can ride out the full extent of any upward market move. You can also diversify into other investments by selling only part of your stock or options. This type of hybrid investment strategy can be both the safest and the most profitable way to handle stock compensation.

 

 

 

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