Employer-provided equity is often one of the least understood parts of a compensation package. Companies use executive stock options and awards to attract and retain employees, yet many people are unclear on how these benefits work, how taxes apply, and how to make informed decisions over time.
Many wonder, “what impact does equity-based compensation have on my reported earnings?”. Equity can support long-term financial security when you understand what you have and how to manage it.
This guide explains the most common types of stock-based compensation in clear terms. Whether you are early in your career or preparing for retirement, understanding your equity awards helps you make better decisions for your financial future.
What You’re Most Likely to Receive: Executive Stock Options and RSUs
Most employees receive either stock options or restricted stock units (RSUs). These two forms of equity may sound similar, but they work very differently. Stock options and RSUs tend to function more like cousins than siblings— both offer a path to owning company stock, but each plays a unique role in your compensation package.
Stock options give you the right to buy company shares at a set price in the future. Their value depends on whether the stock price rises above that strike price. RSUs, on the other hand, are promises to deliver shares once you meet certain conditions. RSUs have value at vesting because you receive shares without paying a strike price, though the stock price can still fluctuate after delivery.
To learn how stock options, RSUs, and other tools work together in modern compensation plans, see “Driving Big Impacts with Executive Compensation”.
Executive Stock Options
Stock options give you the right to buy company shares at a fixed strike price. When the stock price rises above the strike price, the option gains value. When the stock price falls below the strike price, the option may expire without value.
Companies may set vesting schedules to encourage employees to stay. Most stock option plans include one of two types:
Incentive Stock Options (ISOs)
ISOs can offer tax advantages when you meet specific holding requirements. You generally do not pay regular income tax at exercise, but the spread between strike price and market price is included in Alternative Minimum Tax (AMT) calculations. To receive favorable long-term capital gains treatment, shares must typically be held at least two years from the grant date and one year from the exercise date. Without planning, ISO exercises can create unexpected AMT exposure. Our individual tax preparation and planning services are designed to integrate equity compensation into broader tax strategies.
Nonqualified Stock Options (NSOs or NQSOs)
NSOs are common and straightforward for employers to administer. When you exercise an NSO, the difference between the stock price and the strike price becomes taxable ordinary income. This amount is subject to income tax withholding and may also be subject to payroll taxes. Because exercising requires cash to purchase shares and cover taxes, timing decisions can significantly affect your liquidity and tax situation.
Example: How an Option Gain Becomes Taxable
Taylor receives 5,000 NSOs with a $10 strike price. Three years later, the stock trades at $28 and she exercises.
- Strike price: $10
- Market price: $28
- Taxable spread: $18 per share
- Ordinary income: 5,000 x $18 = $90,000
That $90,000 is treated similarly to bonus income and may increase her tax bracket for the year. If she holds the shares and the stock later drops, she still owes tax on the $90,000 gain recognized at exercise.
Executive Stock Awards and RSUs
Executive stock awards, including RSUs, give you shares once they vest. RSUs do not require a strike price. At vesting, the full value of the shares is taxed as ordinary income. Afterward, you can hold the shares, sell some to cover taxes, or sell all of them.
Example: How RSUs Are Taxed
Dan’s 2,000 RSUs vest when the stock is trading at $40.
- Shares delivered: 2,000
- Value at vesting: $40
- Taxable income: 2,000 x $40
If Dan holds the shares and the price later falls to $30, the account value drops to $60,000 but taxes were based on the original $80,000 value at vesting.
RSUs are an attractive option because they deliver value without requiring a purchase donation, but market risk still applies once shares are in your account.
The Most Overlooked Risk with Executive Stock Options and Awards
Equity compensation is both an investment decision and a tax-timing decision. Over time, employees can accumulate a large portion of their net worth in employer stock. This can create concentration risk—your income, career, and investments may all depend on the same company.
Intentional investing through asset allocation and portfolio diversification can help manage this risk while still participating in future growth.
How to Choose Between Stock Options and Awards
Choosing between executive stock options and awards depends on your goals, your outlook, and your tax situation.
1.) Consider the company’s long-term growth
If you expect the company’s stock to rise significantly, options may offer more upside. If you prefer certainty, RSUs provide value at vesting regardless of market performance.
2.) Understand your tax situation
ISOs require careful planning around holding periods and possible AMT exposure. NSOs and RSUs trigger ordinary income, which influences your annual tax planning.
3.) Fit equity into your broader financial plan
Align equity decisions with goals like paying down debt, saving for retirement, and managing risk. Boulay Wealth advisors can help you bring these goals into focus and create a strategy to help you reach them.
Managing Your Executive Compensation Over Time
Equity compensation requires ongoing review. Markets change, tax rules shift, and your personal goals evolve. Build a routine that includes:
- Reviewing vesting schedules and option expiration dates
- Planning around tax brackets and potential income timing
- Monitoring the size of your employer stock position
- Consider structured selling or 10b5-1 plans if trading windows apply
Working with a wealth advisor can help ensure these decisions support your broader financial and tax goals.
Bringing Your Executive Stock Options and Awards Into Focus
Your company’s executive stock options and awards can strengthen your financial plan when you understand how they work, how taxes apply, and how they fit into your long-term goals. Whether this is your first grant or one of many, informed decisions help you capture the full value of your equity.
If you want guidance on stock options, RSUs, or other equity benefits, Boulay Wealth can help you review your choices and build a plan that supports your future.
Connect with an advisor to discuss your equity compensation and long-term plan needs.