Equity Compensation Can Help with Overall Financial Plans

More than half of equity compensation plan participants plan to use their stock plans for retirement savings, according to ETRADE’s 2016 Corporate Services Annual Participant Survey.

Marc McDonough, vice president of Schwab Stock Plan Services in Denver, Colorado, explains that while defined contribution (DC) plans are the most popular way for employees to save for retirement, savings in those plans is severely limited for executives. Due to statutory limits on DC plan deferrals, “an executive making $250,000 can only put about 7% of compensation in a DC plan,” he says. He notes that Schwab is seeing equity compensation plans being used to save for retirement as well as for philanthropy purposes.

However, equity compensation plans can also be part of an overall financial plan. Two out of five respondents to the ETRADE survey intend on using executive compensation plans for emergency or rainy-day funds.

Emily Schlosser, SVP, Corporate Services at ETRADE Financial Corporation in New York City, tells PLANSPONSOR communications vary by employer, but ETRADE is seeing a trend in employers encouraging employees to use stock plans for diversification and retirement savings. “We are also being asked to help educate employees about overall financial well-being and we talk about equity compensation plans as a part of employees’ overall financial plan which helps with security in retirement,” she says.

McDonough tells PLANSPONSOR Schwab has teams that meet with executives as well as lower-paid employees who receive equity compensation to help them decide the right strategy for using the plans. Employees can use executive compensation plans to pay for children’s college education or a home—getting that off their plate can help them save for retirement. “You don’t pay for all four years of college at once, so we can help employees make plans for each year mapping out a strategy for cash flow,” he says.

Schlosser notes that the tax structure is very different for equity compensation than for a DC retirement plan. With equity compensation, at the time shares are vested, they are taxed, and when an employee sells shares, they pay a capital gains tax. McDonough says capital gains tax can be very expensive for employees who have held company stock for many years. This is why some choose to use the plans for philanthropic reasons rather than retirement and donate the stock to charities.

NEXT: Participant understanding lacking

Schlosser says ETRADE conducts its survey on an annual basis, so it sees some of the same results over time, but it is always surprising how many respondents lack a general understanding of how equity compensation plans work.

The survey of 40,035 ETRADE stock plan participants conducted in March found two out of five don’t understand vesting, two out of three don’t understand tax implications and just more than half understand how restricted stock works.

“Plan sponsors need to educate and communicate to help employees understand,” Schlosser says. “We have clients that span industries, and plans are very customized and differ by client. Some offer the stock plans only to executives; some offer them to a broad base of employees. There are employees that have very little sense of what they are being given. Plan sponsors should think about education as they are developing and designing their plans, to address the understanding of the participant base.”

McDonough adds, “A lot of plans we work with are looking for education about how equity comp works. Our team works one-on-one with participants to provide education and actionable advice. We explain how pricing works, and what stock movement does to the price. We make sure they have a comprehensive understanding of what they own today, and talk about taxes and cash flow needs.”

Corporations use equity compensation plans to attract and retain the best talent. Whether it is to fill in the retirement savings gap or offer opportunities for overall financial well-being, equity compensation plans are a big driver for attracting executives, McDonough says.

Schlosser says employers need to consider what value they are getting by offering the plans if participants don’t understand them.