Basics: Benefits

OK: admit it. When you accepted your last job offer, it wasn't just the 70-hour work weeks, the deluxe cubicle, or even the promise of a steady paycheck that convinced you to sign on. Probably, there was another big motivating factor for taking that new job: stock options.

You aren't alone. Stock options, restricted stock, and other types of equity compensation are valuable long-term wealth-building benefits that inspire people to keep their jobs and remain motivated.

In bull markets, shares of many companies in hot industries can increase exponentially. Stock options seem a fast and easy way to get rich. But markets sometimes falter. High-flying stocks can plummet. Shares that seemed headed for new stratospheric highs quickly tumble to earth. Dreams of exotic vacations and house renovations must be set aside.

It is not healthy for obsessive scrutiny of the company ticker symbol to become the new national pastime. Ecstasy can turn to anxiety when stock markets go up and down like a yo-yo.

Equity compensation remains popular and is still a substantial wealth-builder, whether with stock options or restricted stock. While certain companies and industries experience more volatility than others do, at times the stock prices of all companies seem to drop when the economy sours. While you shouldn't expect an instant fix, don't panic either. Your company's shareholders are in the same boat, but with real money at risk, and are counting on your stock grants to inspire you. They want the grants to encourage you to act and feel like a committed owner.

Experts have a few words of advice for dealing with the craziness. Below are 11 tips from experts in financial planning and human resources about how to stomach the wild ups and downs that stock prices can experience.

1. Stop expecting quick riches. Think of stock options as a long-term investment. "You've got to remember that most options have a 10-year life. It is a long-term incentive," says Mark Edwards, a respected compensation consultant on the west coast. "A whole lot of folks out here like to talk about internet time, not looking out beyond a year or 18 months." Though the stock price may be down now, your stock options will have great leverage if the stock price rises again later in their term. This potential upside can be very rewarding.

With restricted stock or restricted stock units (RSUs), you receive at least some money at vesting, even if the company's stock price has fallen, but the potential upside is less dramatic. You can therefore consider restricted stock/RSUs as the more conservative part of your stock compensation portfolio. To compare in detail the differences between stock options and restricted stock, see a related FAQ.

2. It can be more fun—really! Believe it or not, volatility can be exciting and profitable, according to Corey Rosen, executive director of the National Center for Employee Ownership. Rosen asks employees at companies with rollercoaster stock prices which type of company they would prefer to have stock options in: one with a constant 10% annual gain or one with the same annualized gain over 10 years but with peaks and valleys that greatly exceed 10%.

	Ups and downs actually present good opportunities for profiting on stock options over the ten years you have to exercise them.

While you don't want to fixate on your company's stock chart, these ups and downs actually present better opportunities for profiting on stock options over the 10 years you have to exercise them. For example, employees with incentive stock options (ISOs) who plan to exercise and hold will reap more net tax gains if they exercise at lows and sell at highs. (For details, see this website's section on ISOs.)

3. Use options for big things. Don't depend on unexercised options or unvested restricted stock to cover regular expenses like car payments or mortgages, advises Richard Haas, president of Financial Catalyst Group in Sunnyvale, California. People who plan on using gains from stock grants to cover living expenses can wind up in deep trouble if the share prices tank. Anchor your spending on your cash salary and what you have in the bank so that your lifestyle is no worse off if your company's stock price shrinks.

Haas recommends paying for big purchases with cash from option stock sales. He also cautions clients with ISOs to keep enough cash on hand to cover future tax bills, as there is no tax withholding at the time you exercise ISOs or sell the stock.

4. A watched pot never boils. Remember that watching the company ticker symbol on your monitor eight hours a day will not make the stock go up.

Employees may be far more satisfied with the performance of options if they check their worth a little less frequently. "Imagine you went away on a one-year trip, didn't check the news the entire time, and then looked at your company's stock price," Rosen says.

5. New norms. Get used to turmoil in many industries. In certain industries, fluctuations in share prices may be around for a while. For some companies, volatility is the norm, not the exception. With this said, it is good to remember that the turmoil which has wracked the markets in 2008 is extreme by historical standards.

6. Know your options. Not all option plans are created equal. There are two main types of options: incentive stock options (ISOs) and nonqualified stock options (NQSOs). Identifying which kind of grant you have is key for making sound investment decisions in a volatile market.

	In a volatile market it's safer not to let tax decisions drive your choices.

If you have both types of options, in stable markets it may make sense for tax reasons to focus on which type to exercise and whether or not to hold the shares. However, in a volatile market it's safer not to let tax decisions drive your choices: instead, look at where your company's stock price sits in its trading range, what its prospects are, and what your time horizon for the money is.

With these elements in mind, you are more likely to exercise the options and sell the shares at the same time, so the net gains with ISOs and NQSOs are essentially the same. This makes any concerns over the alternative minimum tax (AMT) and long-term capital gains somewhat irrelevant.

7. Consider advisors. Don't make all the decisions yourself, and avoid the temptation to exercise your stock options and sell the stock as soon as the options (or restricted stock grants) vest. These are complicated financial instruments. Finding an accountant, a lawyer, or a financial planner who is familiar with the tax and investment ramifications of company stock sales is a good way to avoid making rash decisions, particularly when a substantial chunk of your net worth is tied up in your company's stock grants.

	Volatility in the market helps you rethink your greed-to-fear ratio.

A good advisor can help with questions you should be thinking about now if you have exercised ISOs at a market high and are holding the shares. According to Art Meyers, a lawyer with Seyfarth Shaw in Boston, "if employees hold ISO stock from exercises this year, and if the price of the shares has dropped substantially, they need to analyze whether it makes sense to sell the stock in the same year to cancel any potential AMT hit." (See an FAQ on minimizing AMT.)

8. Greed or fear? Volatility in the stock market helps you rethink your attitude toward financial risk. Take a look at your asset allocation for all your investments. This review should include your company stock options, unvested restricted stock, and stock holdings in taxable and 401(k) accounts (see this website's section on diversification and on financial-planning strategies).

You may find that you to have too much in one basket. You may be less nervous if most of your net worth is not riding on your company's stock price. Now is the time to reassess your greed-to-fear ratio. Alternatively, you may find that your company's stock price is quite undervalued and that now is a great time for also buying it on the open market or through an employee stock purchase plan.

9. Stay loose. "Hang on and don't worry about it," advises Sandra Sussman, a former executive director of the National Association of Stock Plan Professionals. Sussman says employees should focus on the aspects of their company's performance that they can control, should remember that they are owners with all the benefits and risks that this brings, and should not get too riled up over external market forces.

	Focus on aspects of company performance that you can control.

10. More grants ahead. While companies are reducing the number of employees who are eligible for stock grants, your first grant of stock options or restricted shares is unlikely to be your last. Stock options still have built-in tax-deferral advantages over straight cash bonuses. When share prices fall precipitously, companies sometimes issue new grants, but don't expect your company to reprice your underwater stock options. Down markets can be a good time to get a new stock option grant, as your exercise price will be lower than your company's usual trading range.

Also, some companies with unusually volatile stock prices are shying away from doling out options in one lump, and some are granting combinations of options and restricted stock. Your company may prefer to dole out batches of options every several months.

11. Remember your real passion. Finally, resist the urge to switch employers just because your company's stock price has tanked. Job-hopping can lead workers to what Michael Dell has called "day-trading with their lives." You're still passionate about your work and what your company is doing. That's what brings real satisfaction.

While the price drop still hurts, and you hope for a rebound, think of the bright side: at least your family and friends will now stop thinking of you as rich and will stop expecting lavish gifts.

Joanna Glasner is a former reporter with Wired News in San Francisco. She researched and wrote this article specifically for myStockOptions.com. Bruce Brumberg is a co-Founder and the Editor-in-Chief of myStockOptions.com.