The Power of Options

Incorporating equity awards (options) as part of a company’s remuneration package is hugely beneficial for both the company, the employees, and even the shareholders as it results in an alignment of interest. The structure of these awards fosters enhanced productivity and cultivates a sense of loyalty among employees

In the last few months, we seen an increasing number of clients who have Restricted Stock Units, ‘RSU’s’, most of who are employed by US tech companies. Consequently, we realised we had to up our game in helping clients understand why we strongly recommend diversifying from a single stock position, and more importantly, how to achieve this.

Here’s the why:

1. Typically, companies that have employee share incentive schemes, also have the following remuneration package.

Income

1. Base Salary.
2. Performance Related Bonus.

Protection

1. Death in Service Life Cover.
2. Income protection cover.
3. Health Insurance.

Pension

1. Employer Sponsored Pension Scheme.

Investment

1. RSU’s
2. Employee Share Purchase Plan

All these benefits are meaningful and have a big impact on achieving financial wellbeing.  The stock options, however, are the one benefit that gives you flexibility to create a diversified portfolio with a mix of assets to limit your exposure to one stock which in turn reduces your exposure.

Understanding the risks

1. Holding a single stock is a high-risk strategy. This risk is further increased when the company share you own is also tied to your employer.
2. For the US tech companies, non – US individuals re subject US estate tax on the value of their tangible and intangible assets located in the United States. While there is an estate tax exemption based on the value of the assets, it is limited to $60,000.
3. For stocks that are held in US custodians, this tax is deducted at source.

Now for the disclaimer, we are not tax advisers, and if you are interested in any of our suggestions below, we strongly recommend you discuss with your tax & financial adviser before you act.

The following actions assume you are Irish resident, ordinarily resident, and Irish domiciled with RSU’s.

Recommended Course of Action

1. Set up a joint account with stockbroker/investment firm of your choice.
2. Transfer vested stock ‘in specie’ to this account.
3. Divest of stock over time availing of the annual CGT exemptions.
4. Reinvesting into a diversified portfolio that supports your actual risk profile and objectives.
5. Consider taking future options as cash, and not stock, using proceeds to top up your diversified portfolio.

You have now actively turned your investment in one great company to a portfolio that is invested in many of the great companies in the world.  You continue to benefit from the growth of your employer through the remaining employee benefits you hold.

It’s a win- win.

Many thanks to Damian Wilson, Joe Thompson, and Patrick Good for the masterclass sessions.