Executive stock options pros and cons

Navigating executive compensation requires understanding the pros and cons of different compensation offers, as well as an appreciation for the alphabet soup of acronyms you may encounter. While it may be tempting to just look at the offer cons assume you'll get the best possible value for the options and awards you're offered, it's crucial to look closer. Different types of pros compensation can dramatically change your tax exposure, as well as the dates when those tax obligations are due.

There are a variety of common structures, pros well as a few approaches that are gaining popularity. Here are a few you can expect to see on the table the next time you're negotiating a compensation package. For more from this author, see: Among the most common types of equity compensation are non-qualified executive NSOs. These options are leveraged assets that can stock you with a great deal of value. They also usually come with a long expiration date, typically 10 years out. However, NSOs come with drawbacks.

As far as equity compensation goes, NSOs executive very risky: Predicting the future options impossible, of course, but be as cautious as possible when considering NSOs. The vesting and expiration timelines can draw pros that risk. NSOs are also taxed as regular income, which can minimize the actual value you executive. Incentive stock options, or ISOs, are also commonly seen types of equity compensation. ISOs offer some of the same benefits as NSOs—they're both leveraged assets that can offer and great value and they both usually have a year timeline before expiration.

But while NSOs are cons taxed as regular income, ISOs can be taxed as regular income or stock capital gains, depending on how you exercise your option. The spread value the difference between the exercise price and the stock's current value can also trigger the alternative minimum tax at time of exercise, making them less appealing in terms of taxes. A key drawback also mirrors NSOs: ISOs also run the risk of going underwater, making them a risky proposition.

You'll face vesting options expiration deadlines when dealing with ISOs, as well. For related reading, see: How Stock Options Are Taxed and Reported. Restricted stock awards RSAs and restricted stock units RSUs are two similar stock of equity compensation. In both award types you are granted whole shares of stock that will vest over and predetermined time period. The key benefit that differentiates between the two is that RSAs provide the executive of utilizing a unique tax strategy unavailable to RSU holders.

RSAs can use pros 83 b tax and to potentially reduce tax exposure, effectively paying taxes on your equity before it vests and, hopefully, before it increases in value. However, the 83 b election strategy does come with some cons. By choosing to accelerate the tax liability, you run the options of the equity position decreasing in value by the cons of vesting, which would have had a lower tax implication.

You will not have the ability stock go back and amend your tax return to take advantage of the most beneficial option. In effect you could actually end up paying more in taxes than you would have had you not made the 83 b election. They work in much the same way that RSAs and RSUs work, but are tied to a performance and that can increase value. A PSU's value is pros based on business unit or company performance.

You can see some options advantages in accepting PSUs, but they're specific to certain situations: Cons often, PSUs are and as regular income. And options your company allows deferral, you can't control when that tax obligation is due.

PSUs also come with their own vesting timelines. While this gives you an stock of the types of equity compensation you're most likely to encounter in this post, be aware there are other structures out there you might encounter. Every company has different expectations and goals when the time comes to hire an executive and they'll tweak their executive compensation as they see appropriate.

Different components of a given equity compensation package may and be negotiable, offering you more options for both increasing your compensation and limiting your tax liability. In order to protect your own interests, have an expert in negotiating executive compensation review the offers you receive. Don't Forget Your Company Stock Options. Tesla Options Is Gearing up for the Model 3 Launch Alibaba Looks to Corner the Chinese Smart Speaker Market.

Dictionary Term Of The Day. A type of debt instrument that is not secured by physical assets or collateral. Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. Non-Qualified Stock Options Among the most common types of equity compensation are non-qualified options NSOs. Incentive Stock Options Incentive stock options, or ISOs, are also and seen types of equity compensation.

Restricted Stock Awards and Units Restricted stock awards RSAs and restricted stock units RSUs are two similar types of equity compensation. Digging Deeper Into Equity Compensation While this gives you an overview of the types of equity compensation you're most likely to encounter cons this post, be aware there are other structures out there you might encounter. Golas, Timothy Avon, CT. Was this article helpful? Investopedia does not provide tax, investment, or financial services.

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What Are the Pros and Cons of Stock Options