Narrator: Paydays are great, but there can be much more to your compensation than a paycheck.
Equity compensation is another way for your employer to increase your overall compensation while providing the potential for an even greater payoff—giving you a stake in the company.
As a stock owner, you benefit when the company’s stock price goes up because your equity compensation becomes more valuable.
Of course, like all stocks, the company’s stock price can go down too. This means your equity compensation could decrease in value.
It’s important to know how your equity compensation works so you know what to expect.
Awards come in many forms, and each has unique terms and conditions. Understanding these can help you make the most of what you get. Common types of awards include stock options, restricted stock awards, and restricted stock units. Let’s briefly look at each.
Stock options are grants that give you the "option," or right, but not the obligation, to buy shares of the company stock at a specific price (“strike price”) on or before a future date. You can potentially profit from stock options if the current stock price rises above the strike price.
However, if the stock price falls below the strike price, the options could be worthless.
In most cases, your employer requires you to stay with the company for a certain period of time in order to be eligible to buy the shares. This is called the vesting period. The vesting period gives the stock time to potentially grow while incentivizing you to stay with the company. After this period is over, you’re able to use the grant to buy shares any time before expiration.
However, equity compensation doesn’t have to be based on time of service; it may be based on a certain performance objective like a sales quota or a production goal. This means an employer can reward you for doing a good job based on the terms of the compensation.
Another type of equity compensation is restricted stock awards. Restricted stock awards are a grant of company shares to an employee. These shares are "restricted" during the vesting period, but unlike stock options, you have all the rights of the shareholder from the beginning, like voting for board members and receiving dividend payments.
A third type of equity compensation is a restricted stock unit, or RSU. An RSU is a promise from an employer to grant a certain number of shares or the cash equivalent at a future date. So, they aren’t options or shares, but grants that are valued based on the performance of the company stock. Like other forms of equity compensation, vesting and delivery of RSUs are based on time of service or performance. Unlike the restricted stock award, you don’t have the benefits of stock ownership until the vesting period has ended and the shares are delivered to you.
The best way to understand all the details of your equity compensation is to read the award agreement provided by your employer.
After reading your agreement, contact your employer to ask questions about any aspects that are unclear.
On-screen text: [Schwab logo] Own your tomorrow
