Here’s how to best invest in your employer’s stock

When public safety technologies company Axon wanted to change the performance incentives for its CEO, Rick Smith, the company took it one step further.

Now, the company’s employees are able to participate in an aggressive compensation plan that’s tied to the public company’s goals. The plan mirrors the same incentives Smith is working towards.

The new plan began in January. All employees received at least 60 stock units in the plan, while employees with compensation of $100,000 and up could increase their participation rate.

The plan’s goal is to take a typical stock grant, a restricted stock unit, and “supercharge” that, according to Axon Chief Financial Officer Jawad Ahsan. That includes a 3-times multiplier for risk, which is also multiplied by nine years, the length of the program.

For an employee, that means a $1,000 RSU could convert to a $27,000 XSU, or eXponential stock unit.

Provided the company hits all its milestones over that nine-year horizon – including market capitalization, revenue and EBITDA (earnings before interest, tax, depreciation and amortization) targets – that $1,000 could ultimately be worth $135,000, Ahsan said.

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The introduction of the plan has changed the way employees engage with the company’s goals, he said.

“Employees started getting a lot more creative about how we can expand beyond our core law enforcement market,” Ahsan said.

Axon’s compensation plan changes were initially inspired by the incentives Tesla gives to CEO Elon Musk. Tesla also provides its employees with an equity compensation plan, according to public disclosures.

If you think you need to work at one of these companies to get those kinds of benefits, think again. Many companies offer restricted stock plans, stock options and employee stock purchase plans. The key is to know what is available to you, said Emily Cervino, head of industry relationships and thought leadership at Fidelity.

“Stock compensation can be a great way for employees to generate wealth and share in the economic appreciation of their company,” Cervino said. “But you really need to understand what you have in order to make the most of it.”

These incentives are usually provided to a subset of employees at a company. But there are exceptions to that, where all employees are granted equity, particularly in Silicon Valley, Cervino said.

Those offers usually take the form of either stock options or full value awards.

A stock option is a right to purchase shares at a fixed price for a fixed period of time. For example, if you’re granted a stock option today when the stock is trading at $10 per share, you can buy that stock for that price once that option is vested. You may have that right for up to 10 years. If the stock is then $40 per share, that means you can still buy it for $10.

Restricted stock is like a stock option, but it doesn’t have a price on it. So the same stock at $40 per share would cost you $40 when you buy it.

Restricted stock is given to employees more frequently than stock options, Cervino said.

It’s important to note that if you have stock options, they come with an expiration date, which is often around 10 years.

If you miss that expiration date, there’s no undoing it. “It’s a use it or lose it proposition with a stock option,” Cervino said.

Many employees have access to broad-based plans called employee stock purchase plans.

These plans are generally made available to all of a company’s employees. But they have to elect to participate in the plan.

An employee stock purchase plan, or ESPP, allows workers to buy their company’s stock through payroll deductions, so it comes out of their paychecks.

One big advantage is that employees get those shares at a discount, Cervino said.

Usually, that is 15% with a feature called a lookback. So if you enroll in the plan when the stock is $10 and you purchase the stock when it’s $15, the discount applies to the lower of the two prices. That means you can buy the stock for $8.50 per share when it’s trading at $15 per share.

Unlike long-term incentives, ESPPs usually buy shares every three to six months. Generally, employees can invest between 1% to 10% of their salary.

But because the IRS puts a $25,000 limit on how much an employee can purchase in stock, the risk of being overexposed to one stock is less compared to restricted stock or stock options, Cervino said.

Because shares in an ESPP can be sold in the short- to medium term, the goals you’re investing for should also match that time horizon, Cervino said. That can include money for a down payment on a house or car, college expenses or a wedding.

As with all investments, there are pitfalls that you want to avoid.

One thing to watch out for: having too high a concentration to your company. This is more common on the long-term incentives side, Cervino said.

Keep in mind that you may also own that same stock in your 401(k) plan. Plus, your salary and all your other benefits are tied to your company.

If you’re thinking about leaving your job, you also should be mindful about what date you choose to leave. That’s because you generally have to be an active employee in order to participate in these plans.

For example, if you have an award scheduled to vest next week, don’t leave your job this week, Cervino said.

In addition, you want to make sure you keep your beneficiaries updated. Depending on where you are in the process of becoming an owner of the stock, you may have to fill out different forms, Cervino said.

As always, you also want to watch the tax consequences of any decisions you make with regard to selling the stock. When possible, you may want to consider spreading out shedding those shares over time or gifting appreciated shares to avoid capital gains tax.