Should you change your financial plan for your stock comp or stick with it?

For many of you who have equity comp, the extreme market fluctuations of 2020–2022 may be your first experience of volatility after a decade of rising markets. Know that it's normal to feel a little rattled. Sudden stock-price declines can stress out even employees and executives who have advanced experience of stock comp (along with their financial advisors).

Sooner or later, volatility may force you to make decisions with your stock options, RSUs, and or company shares that affect your financial future and long-term wealth. Should you change your financial plan or stick with it?

Financial strategies for equity compensation amid volatility and falling stock prices were dominant themes in two myStockOptions webinars. In one webinar on stock option exercise strategies and another on planning for restricted stock and RSUs, panels of financial advisors and tax experts discussed how to navigate volatility and down markets. This diverse group, including CFPs, EAs, and JDs, presented a variety of insights from different strategic angles.



1. Listen To Your Risk Tolerance

David Marsh, a financial-planning case manager at Ameriprise (Minneapolis), pointed out in the stock option webinar that market declines offer a useful period to “confirm or reset risk tolerance.” In good times for your company’s stock price, he observed, it’s easy to be aggressive and bullish in your financial strategy. It’s harder to keep up that resolve when the stock price tumbles. In fact, he continued, a falling or volatile stock price can give you a helpful reality check on your tolerance for investment risk.

A volatile stock price can give you a helpful reality check on your tolerance for investment risk.

He suggests you listen to what your emotions in a downturn are telling you. “How much of a downturn are you willing and able to stomach, and how does that impact your goals? If you’ve been relying on equity comp to meet regular living expenses, that’s a real danger zone which comes to light in stock-price volatility and downturns.” Insights you derive from dark times for the stock price can help you re-examine your goals for share proceeds and re-assess the portion of them that is discretionary.

With nonqualified stock options, he went on, a reduction in the difference between the stock price and the exercise price may seem to create a tempting opportunity to exercise the options. That starts the holding period for the beneficial tax treatment on long-term capital gains at sale when the stock price eventually recovers. This is a common strategy for incentive stock options (ISOs).

However, with nonqualified stock options (NQSOs) there may be better uses for the same money. “You should compare whether to exercise and hold NQSOs or maybe just hold on to that option and put the cash to work in another way,” he advised. “Consider investment risk and tax factors. What I would bear in mind is that if you’re game enough to exercise NQSOs at this time, I would say let’s take that cash and simply buy more shares. If indeed the stock price does recover, by increasing the equity position in the company we may produce a better result.”

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2. Welcome New Option Grants, But Have A Layoff Plan

Option grants made when the stock price is at a low point can become very valuable when the stock recovers.

Megan Gorman, the founder of Chequers Financial Management (San Francisco), complemented David’s thoughts in the stock option webinar with the fact that a depressed stock price is an excellent time to get new stock option grants. Playing a long game, she emphasized, is key to success with equity compensation. “If you go back to March 2009, when the stock market was miserable, it was an amazing time to get a grant with a very low exercise price,” she observed. The stock-price increases during the long recovery made option grants awarded at that time extremely wealth-generating.

But beware of layoffs, she cautioned. Option grants have finite terms and typically only very short periods when options can be exercised after job termination. “It’s important to have a strategy for exercising options and selling stock in the event you are laid off. In these more volatile markets, think about the fact that you are at risk of losing your job. Don’t lose the equity awards you worked so hard for.”

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3. Don’t Forget The Big Picture, But Revisit Your Cash Position

Focus on what you can control: continue to build savings, pay off debt, and shield yourself as much as you can from the impact of volatile markets.

Keep your big-picture financial goals in mind, advised Chloé Moore, the founder of Financial Staples (Atlanta), in the restricted stock/RSU webinar. “Things are a little volatile now, but keep a handle on your financial goals. Focus on what you can control: continue to build savings, pay off debt, and put yourself in a stronger financial position to shield yourself as much as you can from the impact of volatile markets.”

To that end, now is a good time to increase your cash position, she noted. “Your restricted stock units can help with this,” she points out. “That’s a good reason to sell the shares as soon as the stock vests.” If you’re using your RSUs to fund your lifestyle, it’s crucial “to revisit cash flow,” she asserted.

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4. Try To Be Logical Rather Than Emotional

This is often easier said than done, but it’s an attitude worth reinforcing. In the RSU webinar, Meg Bartelt, the founder of Flow Financial Planning (Bellingham, Washington), addressed the irrational tendency to place too much importance on the grant price of restricted stock/RSUs. If the stock price falls between grant and vesting, this mental “anchoring” makes it easy to feel as if you’ve lost something.

If you had the same amount of cash, would you buy your company's stock? If so, you probably want to hold your shares. If not, you probably want to sell them.

“If you received Google RSUs a year ago, the much higher grant value is really depressing now,” she mentioned as an example. “Your projected comp used to be $500,000. Now it’s $300,000. But it’s important to remember that the $500,000 was literally never yours. The only thing that is yours is the number of shares, if you stick around long enough at the company. Be aware of that bias.”

Should you hold your RSU shares or sell them? The test for answering this question, Meg pointed out, “doesn’t change with the stock price.” Rather, she went on, it’s always this: “If you had cash of the same amount, would you buy stock in the same company?” If the answer is yes, you probably want to hold your shares. If the answer is no, you probably want to sell them. “The answer may change with the stock price and market conditions, but not the logical framework,” she emphasized.

Daniel Zajac, the managing partner of Zajac Group (Exton, Pennsylvania), brought up an alternative approach to minimize downside risk in volatile markets if you have both stock options and RSUs. Speaking alongside Meg and Chloé in the RSU webinar, he suggested doing an analysis to determine whether it makes sense for you to hold your vested RSU shares and instead exercise your options and sell those shares. That can safeguard the generation of proceeds you need for specific goals.

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5. Watch Your Estimated Taxes; Look Ahead To Future Grants

Revisit how much estimated tax you’re paying this year on the basis of last year's income.

Meg also observed that a big drop in income between last year and this year means that if you pay estimated tax to keep up with income spikes from RSU vestings, you should revisit how much estimated tax you’re paying. “Estimated tax vouchers for the current tax year are based on last year’s income. If you use last year’s estimated tax vouchers for this year’s lower income, you’re going to be way overpaying estimated taxes this year.”

The inverse is also true, she continued, should you lower your estimated tax payments this year. If the stock price goes back up next year, you want to be sure you’re not underpaying estimated taxes on the basis of your lower income this year.

Daniel echoed Meg’s observations by stressing the importance of “actively working with a CPA” to be sure that you’re neither overpaying nor underpaying estimated tax throughout the year, instead of simply relying on the safe harbors based on your prior year’s income. “If you have significant equity comp,” he stated, “you should be doing quarterly check-ins for estimated taxes.”

Daniel and the other presenters in the RSU webinar also pointed out that a fallen stock price presents new opportunities. If your annual equity comp grants are based on a percentage of your salary, “you may be getting additional shares because the stock price is lower.” This is good news to offset the bad news of a lower stock price.

6. Now Is The Time To Seek Professional Financial Advice

Confidence is easy in bull markets. However, the game changes when stock prices tank and a bear market looms.

Bill Dillhoefer, the CEO of Net Worth Strategies (Bend, Oregon), which developed the StockOpter analysis tool, urges employees with equity comp in a downturn to seek advice from a professional financial planner, if they haven’t already. “When the stock price is going up, you may be getting advice from the watercooler chat and think you don’t need a financial advisor,” he said in the stock option webinar. Confidence is easy in bull markets. However, the game changes when stock prices tank and a bear market looms.

Bill emphasized how much a financial advisor can help you make better decisions and avoid mistakes with stock compensation. A good advisor can “establish and track diversification criteria based on risk.” He recommended understanding your “forfeit value,” a metric an advisor can calculate that shows the value lost if you leave your company to work for a competitor. Even if you’re generally confident in your knowledge of personal finance, advisors can help you “be a little more secure about lasting through these volatile markets without going crazy.”

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Further Resources

The webinars in which these financial-planning experts spoke are available on demand at the myStockOptions Webinar Channel:

myStockOptions.com has other resources and tools on financial planning amid volatility and down markets.

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