Owning a piece of the company pie has become part of the financial picture for millions of American workers as equity compensation programs grow in popularity. The advantages of equity compensation plans extend to employees and employers alike. For the former, it can be a critical tool for building long-term wealth, and for the latter, it can foster greater employee loyalty and longevity.
While equity compensation plans are growing in terms of availability and adoption, a new Schwab survey of workers who participate in such plans uncovered a striking gap between how much employees say they value this benefit and their likelihood of taking action. Though three-quarters of workers view equity compensation and employee stock purchase plans as part of their long-term wealth strategy, only a quarter of participants have ever actually exercised or sold their shares.
The primary factors behind this inaction are fear and uncertainty, with nearly half of workers saying they are worried they would make a mistake if they were to exercise the benefit. It can be a missed opportunity if participants don’t take advantage of their plan at key moments in their financial life, so it’s important for plan sponsors to understand and address what is hindering employees from putting it to use.
Fear is a natural instinct, especially when it comes to making decisions about money. By understanding the root of these concerns and providing the right guidance and education, however, plan sponsors can help participants overcome their anxieties.
The top reasons participants hesitate to exercise their benefit are because they’re waiting for more favorable market conditions, are concerned about the potential tax implications or are waiting for their equity compensation to fully vest, according to the survey. These worries, coupled with the fact that nearly one-fifth of respondents say they just don’t know how to exercise or sell their equity compensation, suggest that participants recognize there are consequences to mishandling their equity compensation and that they need help to deploy it properly.
Breaking down barriers: Where to help
Participants are open to receive help on making the most of this resource. Although only half of participants reported confidence in their ability to make the right decisions about their plan on their own, the vast majority (80%) say they would be extremely or very confident with the help of a financial professional, according to the survey.
To offer effective advice, it’s important to know the specific areas in which participants want help. Half of those surveyed said they want to better understand the tax implications of their decisions. The implications of the new tax policy, as well as existing tax rules, will vary based on each employee’s specific situation, such as their income level and marital status. As a first step, employers should talk workers through any potential tax consequences that could incur.
Many participants are also thinking long term, and plan sponsors should consider shaping advice accordingly. Participants want specific advice on how to use the benefit to help prepare for retirement. For these participants, conversations should focus on the pros and cons of deploying equity compensation for shorter-term financial milestones, such as making a down payment on a house, rather than longer-term investments that will play a role in retirement.
Transforming fear into confidence
So how can plan sponsors put these insights into action? For one, it can make a lot of sense for employers to offer advice specific to equity compensation — ideally including a consultation with a financial professional — as a part of their holistic workplace financial wellness programs. These programs are not offered in vain: In fact, Schwab’s survey reveals that two-thirds of employees who are offered a workplace financial wellness program take advantage of it. Of those using such a program, nearly all found it helpful when making equity compensation decisions.
Another important tactic to consider is tailoring guidance by generation. A baby boomer, for example, has vastly different needs than a millennial, based on factors like personal and family financial obligations and the length of time to accumulate wealth. Employers should encourage millennials to keep an eye on the bigger picture and help them understand the role equity compensation can play in both short-term scenarios and long-term plans, but advise older generations to center on the role it can play in retirement.
Interestingly, among those surveyed, boomers and Gen Xers report lower confidence in their ability to make decisions about their equity compensation than millennials do. Therefore, these generations may need to be armed with age-appropriate guidance to help them feel more confident in their investment decisions.