Tracking Employee Stock Plans

Tracking Employee Stock Plans Colleagues Outside of Office Building

While cash is king, paying bonuses with stock shares and equity is a powerful incentive for some companies – mainly startups and those low on capital.

When you find yourself on the receiving end of one of these deals, it’s essential to understand how everything works and what value it’s actually providing you.

In this article, we’ll cover some key ideas and concepts related to employee stock plans and how to track them with a software platform like StockMarketEye.

What are Employee Stock Plans?

Employee stock plans (ESP) describe a wide variety of programs that replace cash bonuses with company equity. They may come in the form of discounted stock shares or stock options.

Your ESP might be better than cash if the company is poised for explosive growth.

ESPs serve two primary purposes:

  1. First, it gives companies that are short on cash (e.g., startups) a way to pay bonuses to valuable employees without burning through cash reserves.
  2. Second, ESPs incentivize long-term employee buy-in by aligning employee goals with company goals. If the stock goes up, everybody wins.

They Are Not Free Money

It’s important to remember that your ESP is not free money. Instead, consider it a mandatory investment with a cash bonus you were supposed to get.

Plus, you must be aware of all vesting and exercise dates for tax purposes. With different tranches vesting at other times, losing track of what you own and when is easy.

Employee Stocks Need to Vest

Vesting is the time period between when you get your shares and when you can sell them or exercise the options.

This time gap incentivizes good talent to stay with the company for a specific amount of time, even if monetary compensation is lower.

Essentially a company doesn’t want to hand you a bunch of stock on day one so you can quit, walk out the door, and sell it all the next day.

Vesting Often Happens in Tranches

ESPs don’t usually vest all at once. Instead, equity gets doled out in increments called tranches.

For example, if they award you 100 company shares, you might get 25 per year over the next four years. Depending on the ESP type, you may end up with various holdings at wildly different prices – ideally, all in the positive direction.

Again, this process helps align your goals with the company’s. Paying out your equity compensation in increments gives you an incentive to remain with the company and ensure the stock price continues to rise.

You Get Your Shares on the Exercise Date

The exercise date is when you can convert your stock options into shares. In other words, this is the day you can buy the shares they promised.

Tracking Vesting Dates and When You Exercise is Important for Taxes

Vesting dates are essential to know for tax purposes. When your equity compensation vests, it now counts as income according to the government.

Also, you must keep your shares for at least a year after vesting to avoid short-term capital gains taxes. Keep an eye on the vesting dates to ensure no surprises at tax time.

Your tax liability may begin on the exercise date, even if you have not converted your options to shares. Options rules vary significantly by country, so check the local laws.

StockMarketEye Will Track Employee Stock Plans

Your ESP’s value will change over time, like any other stock on the market. That means to know the net worth of the shares after fees and taxes, your employee stock plans need to get tracked like the other investments in your portfolio.

Fortunately, tracking your ESP is simple and easy with StockMarketEye:

  1. Collect all relevant information about your ESP, including the type of plan, the number of units, purchase price, vesting date, exercise date, etc. If you don’t have the info, contact your company, and they can fill you in.
  2. Open StockMarketEye and create a new portfolio group that will contain all information related to equity compensation. Then, create a new portfolio for each tranche of stock, options, etc. StockMarketEye allows you to track different investments separately while still seeing how it all fits together in your overall portfolio.
  3. Input the specifics of the stock or option you want to track into each portfolio. As shares vest or you exercise options, you can “sell” from one portfolio to another to keep everything organized and accurate.
  4. Click on any portfolio or portfolio group, and the graph will appear in the graph window, allowing you to compare your ESP to various benchmarks. Compare individual tranches, specific options, or your entire ESP to measure performance.
  5. Also, use portfolio reports to see detailed performance breakdowns, diversification, and many more parameters – very helpful when taxes are due. With a few clicks, you have all the data you need to ensure you’re square with the government.

Types of Employee Stock Plans You Can Track

Companies have many methods and strategies to compensate employees with equity. While the following isn’t a complete list, it gives you an idea of the range of options available:

  • Employee stock option (ESO): Employees get the right – but not the obligation – to buy stock at a specific strike price after the exercise date. ESOs come in two types: incentive (ISO) and non-qualified (NSO). ISOs are generally for top management, and NSOs are more for regular employees.
  • Employee share option plan (ESOP): Basically the same as an ESO, but some countries might use this term instead.
  • Employee share scheme (ESS): Allows employees to buy preferential shares from their company, usually at a discount. These are common in Australia.
  • Employee stock purchase plan (ESPP): Employees buy discounted company stock incrementally over time through payroll deductions, similar to 401(k) contributions.
  • Restricted stock unit (RSU): Unlike ESOs, RSUs are shares given directly to employees following a vesting period. They are restricted because there is a delay between when the employee is awarded the stock and when it can be sold.
  • Restricted stock awards (RSA): Basically the same as RSU but with dividend and voting rights.
  • Stock grants: The company grants stock directly with immediate ownership rights. Specific performance or longevity criteria might be attached.
  • Stock appreciation rights: Employees are paid for the amount the stock goes up, which can be in the form of cash or stock.
  • Phantom stock: Employees are paid a future cash bonus based on a defined number of shares, but no share ownership transfer occurs.
  • Direct stock purchase plan (DSPP): Allows employees to buy shares directly with after-tax money, though usually at a discount or with other benefits.

Start Tracking Your Vested Shares Today

Equity compensation can be a great deal if you handle it correctly and remember that this is your bonus, not free stock. Unlike a cash bonus, you need to treat it like any other investment.

That means monitoring its value and being ready to cut it loose when the time is right. Are you ready to start tracking your employee stock plan?

StockMarketEye is a consolidated portfolio tracker, giving you all the tools you need to successfully manage your employee stock plan and your other investments. We offer a no-risk, free trial, so check it out today and see if it’s right for you.

Jonathan Anthony Avatar
Jonathan Anthony Jonathan Anthony has spent the last 20 years writing about finance, fitness, films, freedom, and just about everything else. A native of the USA, he is now a citizen of the world.