Managing Employee Stock Options

Stock Option Concentration 

​Diversification. We hear this word over and over again when the topic of investing comes up, but it is often overlooked, especially in regards to one specific situation: employee stock compensation. Amazingly, a recent survey from Schwab Stock Plan Services showed that over 75% of people who receive stock options as compensation have never exercised or sold their shares. If you find yourself in this situation, taking control of your financial situation requires several simple yet effective changes.

What are employee stock options?

Employee stock compensation comes in many different forms. Some require a vesting period before an employee can cash out, while others act as stock options, allowing the employee to purchase the employers stock in the future (often at a more attractive price). Whichever type of stock award has been granted, employees deal with the same situation: they are too heavily concentrated in their current (or previous) employer’s stock. ​

All your eggs in one basket 

During bull markets, employees who are compensated in stock options excitedly watch their net-worth grow. Having a high percentage of their net worth tied up in a single stock seems to be working, why make a change? Bull markets end.
Take General Electric (NYSE: GE) as an example. From 2009 - 2016, the conglomerate grew steadily, with little reason to believe things would change. Over the past two years, GE has declined by over 80%. Employees, who didn’t take the initiative to diversify, have sadly experienced significant declines in their net worth.

Investigating the big picture is an important first step, and it often can point out misalignment in overall asset allocation. If you have any questions, please email me at:
[email protected].